CHAPTER 17 Inequality, Redistribution, and Health Care
Michael Parkin
ECONOMICS 5e
Learning Objectives
Describe the inequality in income and wealth in the United States
Explain why wealth inequality is greater than income inequality
Explain how economic inequality arises
Learning Objectives (cont.)
Explain the effects of taxes and social security and welfare programs on economic inequality
Explain the effects of health-care reform on economic inequality
Learning Objectives
Describe the inequality in income and wealth in the United States
Explain why wealth inequality is greater than income inequality
Explain how economic inequality arises
Economic Inequality in
the United States
Should we look at the distribution of income or wealth?
Income is the amount that is received in a given period of time.
In 1995, the richest 20 percent of families received percent of total income.
Economic Inequality in
the United States
Should we look at the distribution of income or wealth?
Wealth is the value of the things it owns at a point in time.
The wealthiest 1 percent of families owned 33 percent of total wealth.
Economic Inequality in
the United States
Lorenz Curves
A Lorenz curve graphs the cumulative percentage of income against the cumulative percentage of families.
Lorenz Curves for
Income and Wealth
Families Income Wealth
Cumulative Cumulative Cumulative
Percentage Percentage Percentage Percentage Percentage Percentage
a Lowest 20 20 0 0
b Second 20 40 0 0
c Third 20 60 4 4
d Fourth 20 80 11 15
e Highest 20 100 85 100
Lorenz Curves for
Income and Wealth
Cumulative % of families
40
20
40
60
80
0
20
60
80
100
Cumulative % of income & wealth
100
Line of
equality
Income
Wealth
b
c
d
e
a
Trends in the Distribution of
Income: 1950–1998
Economic Inequality in
the United States
Who Are the Rich and the Poor?
The poorest household is likely to be:
a black woman
over 65 years of age
lives in the South
has fewer than eight years of education
Economic Inequality in
the United States
Who Are the Rich and the Poor?
The wealthiest household is likely to be:
a college-educated white married couple
between 45 and 54 years of age
has two children
lives in the Northeast
The Distribution of Income by
Selected Family Characteristics in 1994
Economic Inequality in
the United States
Poverty
Poverty is a state in which a family’s income is too low to be able to buy the quantities of food, shelter, and clothing that are deemed necessary.
Poverty is a relative concept.
The distribution of poverty by race is unequal:
12 percent of white families
31 percent of Hispanic-origin families
33 percent of black families
Learning Objectives
Describe the inequality in income and wealth in the United States
Explain why wealth inequality is greater than income inequality
Explain how economic inequality arises
Comparing Like with Like
How do we measure a person’s economic situation?
Measure their income?
Measure their wealth?
Long period of time?
Short period of time?
Comparing Like with Like
Wealth Versus Income
Wealth is a stock of assets.
Income is a flow of earnings that results from the stock of wealth.
Wealth data measures tangible assets and exclude human capital.
Income data measures income from both tangible assets and human capital.
Capital, Wealth, and Income
Lee Peter
Wealth Income Wealth Income
Human Capital 200,000 10,000 499,000 24,950
Nonhuman Capital 800,000 40,000 1,000 50
Total $1,000,000 $50,000 $500,000 $25,000
Comparing Like with Like
Annual or Lifetime Income and Wealth?
Incomes vary with age.
Some inequality results from differences in peoples' stage of the life cycle.
Therefore, inequality of annual incomes overstates the degree of lifetime inequality.
Learning Objectives
Describe the inequality in income and wealth in the United States
Explain why wealth inequality is greater than income inequality
Explain how economic inequality arises
Resource Prices,
Endowment, and Choices
Family income depends upon:
Resource prices
Resource endowments
Choices
Resource Prices,
Endowment, and Choices
Resource Prices
Individuals with different skill levels earn different incomes.
Resource Endowments
Individuals have different family endowments in capital and human abilities.
Distribution of income and wealth is non-normally distributed.
The Distribution of Income
Income (thousands of dollars per year)
Price (dollars per chip)
10
2
4
6
8
20
30
40
50
60
0
Mode income
Median income
$31,241
Mode Income
$44,938
Resource Prices,
Endowment, and Choices
Choices
Wages and the Supply of Labor
People who earn higher wage rates tend to work more hours.
Savings and Bequests
Debts Cannot Be Bequeathed
Assortative Mating
Learning Objectives (cont.)
Explain the effects of taxes and social security and welfare programs on economic inequality
Explain the effects of health-care reform on economic inequality
The Scale of
Income Redistribution
Market income is a family’s income in the absence of government redistribution.
Redistribution reduces the inequality of incomes.
Income Redistribution
Cumulative % of families
40
20
40
60
80
0
20
60
80
100
Cumulative % of income & wealth
100
Line of
equality
Distribution
after taxes
and benefits
Redistribution
Market
distribution
Income Redistribution
The Big Tradeoff
Income redistribution creates a big tradeoff:
Uses scarce resources
Weakens incentives
Welfare Reform
In 1992, there were 10 million single-mother families.
This number is almost 30 percent of families with never-married children under 21.
In 1991, these families were owed $18 billion in child support.
Of this amount, $6 billion was not paid and a quarter of the women received no support from their absent partners.
Welfare Reform
1996 Personal Responsibility and Work Opportunities Reconciliation Act
Eliminated AFDC—Created TANF
AFDC
Anyone could receive benefits
No incentive to find work
TANF
requires work or community service
Limited to 5 years
Negative Income Tax
Negative Income Tax gives every family a guaranteed minimum annual income and taxes all income above the guaranteed minimum at a fixed marginal rate.
Comparing Traditional Programs
and a Negative Income Tax
Market Income
Income after redistribution
G
0
A
C
Taxes
Welfare
trap
No distribution
Benefits
Current
programs
and taxes
Current
redistribution
arrangements
Comparing Traditional Programs
and a Negative Income Tax
Market Income
Income after redistribution
G
0
B
Higher
taxes
A negative
income tax
Current
programs
and taxes
Break-even
income
Higher
benefits
No distribution
Negative
income tax
Learning Objectives (cont.)
Explain the effects of taxes and social security and welfare programs on economic inequality
Explain the effects of health-care reform on economic inequality
Health-Care Reform
Two major problem areas:
Health-care costs appear to be out of control.
Private health-care insurance does not cover everyone.
Who Pays for Health Care?
Problems of Health-Care Costs
Health-care costs have increased more rapidly than consumer prices due to:
Limitations on labor-saving technological change
Expensive technologies to treat medical conditions that were previously untreatable
The Rising Cost of Health Care
The Market for Health Care
0
P0
Q0
D0
S0
S1
D1
P1
Q1
Price of health care
Quantity of health care
Health-Care Insurance
Two Problems With Health-Care Insurance
Moral Hazard
Insured people are less concerned with health risks.
Adverse Selection
People who know they have a high chance of falling ill are more likely to buy insurance.
Reform Proposals
A Bigger Role for Government?
Canada
The government is the sole provider of health care services.
It runs the hospitals, pays the doctors and other health care professionals, and buys drugs for people with low incomes.
Private health care is illegal in Canada.
Doctors ration procedures for which there is an excess demand by lengthening waiting periods.
The End
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Instructor Notes:
1) The cumulative percentages from the table of income and wealth are graphed against the cumulative percentage of families.
2) If income and wealth were distributed equally, each 20 percent of families would have 20 percent of the income and wealth--the line of equality.
3) Points a through e on the Lorenz curve for income correspond to the rows of the table.
4) The Lorenz curves show that income and wealth are unequally distributed and that wealth is more unequally distributed than income.
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Instructor Notes:
1) Education is the single biggest factor affecting family income distribution, but size of household, marital status, and age of householder are also important.
2) Race and region of residence also play a role.
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Instructor Notes:
When wealth is measured to include the value of human capital as well as nonhuman capital, the distribution of income and the distribution of wealth display the same degree of inequality.
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Instructor Notes:
1) The distribution of income is unequal and is not symmetric around the mean income as human physical and mental abilities are.
2) There are many more families with incomes below the mean income than above it.
3) Also, the distribution has a long, thin upper tail representing the small number of families who earn very large incomes.
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Instructor Notes:
1) Taxes and income maintenance programs reduce the degree of inequality that the market generates.
2) In 1995, the 20 percent of families with the lowest incomes received net benefits that increased their share of total income from percent to 13 percent.
3) The 20 percent of families with the highest incomes paid taxes that decreased their share of total income from percent to 31 percent of total income.
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Instructor Notes:
1) The graph shows traditional redistribution arrangements--the blue curve.
2) Benefits of G are paid to those with no income.
3) As incomes increase from zero to A, benefits are withdrawn, lowering income after redistribution below G and creating a welfare trap--the gray triangle.
4) As income increase from A to C, there is no redistribution.
5) As increases above C, income taxes are paid at successively higher rates.
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Instructor Notes:
1) The graph shows a negative income tax which gives a guaranteed annual income of G and decreases benefits at the same rate as the tax rate on incomes.
2) The red line shows how market incomes translate into income after redistribution.
3) Families with market incomes below B, the break-even income, receive net benefits.
4) Those with market incomes above B pay net taxes.
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Instructor Notes:
1) Government pays 45 percent of the total cost of health care, up from 26 percent in 1965.
2) The direct payments by patients declined from 42 percent of the total in 1965 to 20 percent in 1994.
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Instructor Notes:
1) The cost of health care has increased much faster than the average price of other goods and services.
2) The reasons are that health care is a labor-intensive industry--a personal service industry--so labor costs increase and quality improvements have changed the nature of the product and increased its cost.
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