5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

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160 › Step 4. Review the Knowledge You Need to Score High

• The closer the Gini ratio gets to zero, the more equal the distribution of income.


• The closer the Gini ratio gets to one, the more unequal the distribution of income.

% of families

% of income

0% 100%

100%

0%

Perfect

Equality A Lorenz Curve

B

Figure 11.6

What Are the Sources of Inequality?

The market is not always a good mechanism for distributing income equally. There are

some commonly accepted factors for income inequality:

• Ability.Because natural ability is not distributed equally, income is not distributed
  equally. This factor would explain why some quarterbacks or artists are more highly
  paid than other quarterbacks or artists.


• Human capital.Individuals augment their ability with education and training, result-
  ing in higher income. Not everyone attains the same level of human capital, so income
  is not equally distributed.


• Discrimination.Despite social progress, discrimination is a hurdle that might not be
  surmountable even with high levels of ability and human capital.


• Preferences.Some individuals, even with high ability and human capital, prefer to max-
  imize utility with more leisure and less labor.


• Market power.We learned that monopoly and monopsony markets are detrimental to
  consumers and workers. The more market power held in the hands of the few, the more
  unequal the distribution of income.


• Luck and connections.Some are born into prosperity, and some are lucky enough to
  stumble upon the right connections.

Can Income Be Redistributed?

Our economic system emphasizes a productivity-based distribution of resources, but we

know that this system does not overcome all of the equity issues that are theoretically solved

by egalitarianism. We have decided that the government should have a role in income dis-

tribution. The idea behind redistribution of income is that the government collects taxes

from one segment of society and transfers it to another. These transfers come in the form

of social programs like government housing, Medicare, or public education. And while

most agree that these programs are essentially good, how government decides to tax is a

hotly debated issue along philosophical and political grounds. We summarize the nature of

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