The Market's Inability to Achieve Equity
Even when markets are efficient, they may produce highly unequal distributions of income and wealth. Equity refers to fairness in distribution, which is distinct from equality (equal shares). The Lorenz curve and Gini coefficient are tools to measure income inequality. Governments use progressive taxation, transfer payments, and public provision of services to promote greater equity, though there are trade-offs with economic efficiency.
Key Terms & Definitions
Equity
Fairness in the distribution of income and wealth — not necessarily equal shares, but a distribution considered just by society.
Equality
An equal distribution of income or wealth among all members of society.
Lorenz Curve
A graphical representation of income distribution — plots the cumulative share of income received by the bottom x% of the population.
Gini Coefficient
A measure of income inequality ranging from 0 (perfect equality) to 1 (perfect inequality). Calculated as the area between the Lorenz curve and the line of perfect equality, divided by the total area under the line of equality.
Progressive Tax
A tax where the average tax rate increases as income rises — takes a higher proportion from higher earners.
Regressive Tax
A tax where the average tax rate decreases as income rises — takes a higher proportion from lower earners (e.g., VAT, excise duties).
Transfer Payments
Government payments to individuals not in exchange for goods or services — e.g., unemployment benefits, pensions, child benefits.