Question

There is growing concern about poverty and income inequality. These two concepts, however, are not the same. Income inequality deals with the percentage of income earned by the different income groups, while poverty is concerned with how difficult it is for the poor to meet basic needs. In Section 1.4, you read about deontological and consequential approaches to ethics. Using those approaches, evaluate how well free market systems versus government intervention in markets address poverty and income inequality. Include in your discussion an explanation of how people in a free market economy, acting in their own self-interest, can better those around them.

Answer 1

Most LDCs experience growing inequality in income distribution with a majority of people remaining in poverty while a small elite captures a disproportionate share of gains from eco­nomic growth. Poverty and inequality imply absence of social justice.

Moreover, growing in­equality and poverty create various socio-political problems, suet) as dissatisfaction and frustration among the poor, which often culminate in disruption and civil war and destroy the social and political basis of economic activities.

Poverty refers to deprivation from certain basic things of life such as food, cloth, decent accommodation, safe drinking water, health care and minimum educational opportunities.

Income inequality among households is measured by the distribution of incomes according to size (or level) of income per household. The distribution across income-size classes is called 'the size distribution of income'. The higher the income share of high-income classes and the lower the share of low-income classes, the more unequal income distribution is supposed to be.

Small changes in income distribution can have a large effect on poverty. A simple arithmetical example can help visualise this. Imagine a country where the share of national income that goes to the poorest 20% of the population increases from 6% to 6.25%. A change in income distribution of one quarter of one percent would barely affect the Gini coefficient, but for the poor this represents a 4% increase in their total income. Such a small redistribution would have the same effect on poverty as doubling the annual growth of national income from 4%, which is the projected growth rate of many African countries, to 8%, which is necessary to achieve the income poverty Millenium Development Goal.

If inequality in income distribution, as measured by such indicators for example Gini-coefficient, remains the same, increases in Per Capita Income are sure to reduce the incidence of poverty. However, if inequality is bound to rise along the rising of the inverted- U shaped-curve, low-income economies may have to experience an increased incidence of poverty-when they begin to experience economic growth as measured by increase in real PCI. As in the case of in­equality, this relationship between poverty and economic growth in the early stage of development can be confirmed by cross-section data and not time-series data.

Poverty, inequality and growth interact with one another through a set of two-way links. Some of these links can be explored separately, but often one influences another causing indirect effects. For instance inequality can indirectly influence poverty as inequality affects growth and growth in turn influences poverty.

An unequal distribution of income and wealth may result in an unsatisfactory allocation of resources and can also lead to alienation and encourage crime with negative consequences for the rest of society

The free-market system will not always respond to the needs and wants of people with insufficient economic votes to have any impact on market demand. What matters in a market based system is your effective demand for goods and services.

When we are discussing inequality and poverty, we make value judgements i.e. normative views about what is an acceptable scale of inequality and what is not.

Free market economists argue that government intervention should be strictly limited as government intervention tends to cause an inefficient allocation of resources. However, others argue there is a strong case for government intervention in different fields, such as externalities, public goods and monopoly power but also, Policy towards inequality and poverty is influenced by the desire to achieve both horizontal and vertical equity. Horizontal equity means that, as a guideline for tax and benefits policy, individuals in the same financial circumstances have the same fundamental ability to pay taxes, and, therefore, should be taxed at the same rate.

The principle of vertical equity suggests that, when individuals are in different circumstances and have different abilities to pay, they should not be taxed at the same rate.

Personal level experience was that I set up a shop ( Milk Shop) near a very poor village and because of the shop I was able to give employment to 3 poor families to sustain their lives.