Public Goods, Externalities, and the Role of Government ‹ 159above their productivity. A-level students lack the motivation to produce A-level
work because they know compensation falls below that. The high-productivity
students get disenchanted and disgruntled, and work even less.Productivity Share?
If egalitarianism suffers from a lack of productivity incentives, maybe everyone’s share of
economic resources should be based upon individual productivity. In other words, this
marginal productivity theorysays your wage is a function of your marginal revenue prod-
uct. If markets are competitive, this can be quite efficient. In theory, this could even be fair.
The flaw in this method of income distribution is that not all citizens are given a fair shake
at demonstrating to the labor market their true marginal revenue product. Think of all of
the advantages, large or small, that you were lucky enough to be born with. Now imagine
all of them being removed from your past and present. Productive individuals who have few
advantages can overcome obstacles with hard work, but some societal barriers (e.g., discrim-
ination, a disability) prevent them from ever receiving a compensation equal to their pro-
ductivity.
How Do We Measure the Income Distribution?
There are a couple of common ways to see a nation’s income distribution. Whether or not
we think this is “fair” is another question entirely.
- Quintiles.
Economists sort households from the lowest incomes to the highest incomes and then
divide that range into fifths, or quintiles. In each quintile lies 20 percent of all households.
Table 11.1 illustrates the income distribution in 2000 and 2010 as published by the
Census Bureau. If income were perfectly distributed, each 20 percent of the families in the
United States would have 20 percent of the total income.
Table 11.1
% OF TOTAL INCOME % OF TOTAL
QUINTILE (2000) INCOME (2010)
Lowest 20% 3.6% 3.3%
Second 20% 8.9% 8.5%
Third 20% 14.8% 14.6%
Fourth 20% 23.0% 23.4%
Highest 20% 49.8% 50.2%
Total 100.0% 100%
- Lorenz Curve and Gini Ratio.
The above quintile distribution can be graphically illustrated with a Lorenz curve
(see Figure 11.6). The farther the Lorenz curve lies below the hypothetical line of perfect
equality, the more unequal the distribution of income. This distance of the actual distribu-
tion of income from the line of perfect equality is calculated by constructing a Gini ratio,
the area of the gap between the perfect equality line and the Lorenz curve (A) as a ratio of
the entire area (A +B). The closer the Gini ratio is to zero, the more equal the distribution.
The closer to one, the more unequal the income distribution.
Gini ratio =Area A/(Area A +Area B)