Learning Objectives

Equity and Income Distribution

Equity can be defined as how income is divided amongst society and how fair this distribution is. The level of a person income provides an incentive to work. It also reflects the material living standard of a household. If income levels are unequal and greatly divided, society is not deemed equitable and may cause social unrest.

Income distribution is the role of the government. In Australia, the vertical income tax system is used, meaning people with higher incomes pay more tax than those on lower income levels.

How is equity measured?

Economists use a Lorenz curve to measure equity in a country as it shows the percentage of income received by different percentages of the population. For instance, a society that has low-income equality would have the top 80% of wealth owned by 10% of the population (as an extreme example.) The model above shows an example Lorenz Curve from https://www.aph.gov.au.

This model is based on the Gini coefficient. This is a ratio that measures the area between the line of perfect equality and the actual Lorenz Curve. It is a scale from 0 to 1, where 0 reflects a society with perfect wealth distribution and 1 is the most unequal society. Australia has maintained a rank of 0.34, which is the 11th highest ranking in the world.

The relationship between efficiency and equity

Most markets are efficient as they maximise total market welfare. However, to ensure a harmonious society, the principle of equity must be considered. In general, as markets aim to be efficient in order to generate a larger output, it makes the equitable distribution of that income uneven. In a market economy, perfectly even income distribution is difficult to achieve as many factors determine an individual salary.