Sample 3.4 - Student exemplar for PEER assessment practice
Market failure occurs when a (free) market fails to deliver an efficient or equitable outcome
Income distribution in New Zealand can be assumed to be inequitable because for many decades successive governments (both National and Labour) have intervened in an attempt to redistribute income from high income earners to low income earners.
Graph 1 – NZ Income Distribution
(with government intervention)
In the remainder of this essay I will analyse the impact of 2 policies on NZ’s Income distribution and decide which one is the most efficient and / or equitable.
Policy 1 – Lower income tax rates for high income earners
Theoretically, by decreasing income tax, there will be an increase in incentive to work harder, as people can expect more disposable income.
Lower tax for high earners income
The government assumes that there will be economic growth in New Zealand as the spending of higher income earners creates larger circulation of money (ie. Increased consumption results in a multiplied increase in gross domestic product). They also assume that increased spending by high income earners will trickle down to low income earners as more people will be employed due to the economic growth.
Although income distribution may worsen the increased income more people would be earner higher would mean
NZ’ers standard of living as a whole should improve.
Policy 2 – Working for Families (Targeted Tax Credits)
“Low” income families receive tax credits from the government. This policy is designed to make easier for NZ’ers to work and raise a family. Families with children are over-represented in NZ’s poor so giving them additional after tax income will result in a more equal distribution of income. It could also improve efficiency in the long run, as the increased family income should lead to healthier children (eg.

Working for families earners income because higher income could lead to healthier eating or more visits to the doctor). If children are less sick they will perform better at school resulting in a more skilled and productive workforce in the future.
With higher family incomes more children can afford tertiary study, also making the workforce more productive in the long run.
Conclusion – Which policy is the most efficient and / or equitable?
Proponents of lowering income tax for high income earners recognise that it will not improve equality but they argue since everybody will be better off (through the trickle down of increased spending by the
“rich”). This policy was part of Rogernomics introduced in NZ in the 1980’s and the trickle down has not occurred.
The latest Ministry of Economic Development Report (2011) included the following figure showing
NZ’s nominal GDP has fallen (particularly when compared to Australia and the UK)

In addition, the impact of Rogernomics and more free market approaches since the
1980s have significantly widened NZ’s income distribution (ie gap between high and low incomes is wider).
Critiques of working for families (and social welfare in general) argue that people who receive money from the govt will become less self sufficient. Due to laziness, since they receive income even without working (lost incentive to work). However, the report shows that since working for families was introduced
(in early 2000) hours worked per capita have remained relatively high
So overall I would choose working for families it has the longer term hope of improving productivity and in the short term seem to have slowed the worsening income distribution that the gini coefficient graph
(Fig 1.7) shows occurred in NZ after tax rates for high income earners were reduced. It has the potential to both improve equity and efficiency but the lower income tax for the high income earners could only increase efficiency (and it doesn’t appear to have done this).