MARKET FAILURE #4
UNEQUAL DISTRIBUTION OF
WEALTH AND INCOME
Net
Worth
over $2.3
billion
Copyright
ACDC Leadership 2015
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INCOME VS. WEALTH

Income is the amount of money that a person receives
in return for services, sale of goods, or profit from
investments.



Which of these ways of gaining income do you think is most
profitable?
Wealth is the net value of a person, the total value of
assets minus liabilities.
Income can lead to wealth, which can help to change
the way that income is generated
Less
work, more investment
(and thus, more income…
…and faster growing wealth…)
Income Inequality
In 2014, the average American family made
$72,641. Everyone is obviously rich.
**US Census Bureau
What’s wrong with using the average?
Averages reveal absolutely nothing about how
income is distributed.
The median American family earned just
$51,939
What accounts for the difference
between the average (mean) and the
median??
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ACDC Leadership 2015
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DISTRIBUTION OF
WEALTH IN THE US
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ACDC Leadership 2015
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GAP BETWEEN RICH
AND SUPER RICH
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ACDC Leadership 2015
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CAUSES OF INCOME INEQUALITY
– JOT SOME DOWN
 Ability
 Education
and training
 Discrimination
 Preferences and risks
 Unequal distribution of wealth
 Market power
 Luck, connections, and misfortune
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GREG VS. TYRONE
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ACDC Leadership 2015
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INCOME INEQUALITY OVER TIME
 Rising
income inequality since
1970
 Causes of growing inequality?
Greater
demand for highly skilled
workers
Demographic changes
International trade, immigration,
and decline in unionism
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THE LORENZ CURVE
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ACDC Leadership 2015
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Measuring Income Distribution
Review the process:
• The government divides all income earning
families into five equal groups (quintiles) from
poorest to richest.
• Each groups represents 20% of the population.
• If there was perfect equality then 20% of the
families should earn 20% of the income, 40%
should earn 40% (and so on).
• The government compares how far the actual
distribution is from perfect distribution then
attempts to redistribute money fairly.
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ACDC Leadership 2015
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Measuring Income Distribution
Let’s distribute $100:
Group #1 (Poorest 20%)
• Total of $5 (5% of total income)
Group #2
• Total of $10 (10% of total income)
Group #3
• Total of $15 (15% of total income)
Group #4
• Total of $25 (25% of total income)
Group #5 (Richest 20%)
• Total of $45 (45% of total income)
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The Lorenz Curve
100
Percent of Income
80
Perfect Equality
60
40
20
0
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ACDC Leadership 2015
20
40
60
80
Percent of Families
100
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The Lorenz Curve
100
Lorenz Curve
(actual distribution)
Percent of Income
80
Perfect Equality
60
55
40
30
20
15
5
0
20
40
60
80
Percent of Families
100
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The Lorenz Curve
100
Lorenz Curve
(actual distribution)
Percent of Income
80
Perfect Equality
60
55
40
The size of the
banana shows
the degree of
income inequality.
30
20
15
5
0
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ACDC Leadership 2015
20
40
60
80
Percent of Families
100
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The Lorenz Curve
Percent of Income
Gini CoefficientLorenz Curve
(actual distribution)
Statistical
measurement of
income distribution.
Area A divided by
the sum of areas A
and B
Perfect Equality
Area A
(the size of the banana)
Area B
Area A
Area A + Area B
Percent of Families
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ACDC Leadership 2015
The higher the ratio
the more inequality.
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GINI RATIOS

Gini Ratio by country

Gini Ratio by state
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HOW DOES THE
GOVERNMENT WORK
TO REDUCE THIS
INEQUALITY?
Percent of Income
TRANSFER PAYMENTS!
Perfect Equality
Government
transfer payments
shift the Lorenz
Curve toward
more equality
Is that good or
bad?
Percent of Families
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ACDC Leadership 2015
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SHOULD WE TAX THE RICH TO
GIVE TO THE POOR?
Pros
Cons
RICH PEOPLE DON’T
CREATE JOBS
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ACDC Leadership 2015
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WELFARE PROVIDES A SAFETY NET FOR CITIZENS
(RETIREMENT, UNEMPLOYMENT, WORKERS COMP, HEALTH, ETC.)
BUT, WHAT ARE SOME POSSIBLE DOWNSIDES?
Where does the government get
the money for welfare?
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What are Taxes?
Taxes – mandatory payments made to the
government to cover costs of governing.
Why does the government tax?
Two purposes:
1. Finance government operations.
• Public goods-highways, defense, employee wages
• Fund Programs- welfare, social security
2. Influence economic behavior of firms and
individuals.
Ex: Excise taxes on tobacco raises tax revenue and
discourages the use of cigarettes.
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Three Types of Taxes
1. Progressive Taxes -takes a larger percent of
income from high income groups (takes more
from rich people).
Ex: Current Federal Income Tax system
2. Proportional Taxes (flat rate) –takes the same
percent of income from all income groups.
Ex: 20% flat income tax on all income groups
3. Regressive Taxes –takes a larger percentage
from low income groups (takes more from poor
people).
Ex: Sales tax; any consumption tax.
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Federal Income Tax Debate
This is our current system. Is it fair?
The Progressive tax system is the most
effective way to fight this market
failure
GREAT NEWS…
YOU ARE DONE WITH
MICRO!!!!
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