Unequal income distribution, a market failure?

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Linda
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#1
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According to the IB syllabus it is, but why?
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GH
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I don't see why it is. It is just the nature of the capitalist beast.
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Juwel
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It is, as it encourages the apathy of resources. Rich people tend to save more of their money, and this removes from the economy and removes the economic resource of money. The money could be used to produce this, that and t'other, or be spent in the economy and encourage economic growth and employment (the resource of labour) etc. It's a market failure as it stops all resources being utilised and hence encourages inefficiency.
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Linda
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(Original post by 2776)
I don't see why it is. It is just the nature of the capitalist beast.
I don't even see why an unequal income distribution is a bad thing...
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GH
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(Original post by Linda)
I don't even see why an unequal income distribution is a bad thing...
Bad for the socialists of course.
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Juwel
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(Original post by Linda)
I don't even see why an unequal income distribution is a bad thing...
It's economically bad as well as socially. But I have no problem with it!
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Linda
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(Original post by ZJuwelH)
It is, as it encourages the apathy of resources. Rich people tend to save more of their money, and this removes from the economy and removes the economic resource of money. The money could be used to produce this, that and t'other, or be spent in the economy and encourage economic growth and employment (the resource of labour) etc. It's a market failure as it stops all resources being utilised and hence encourages inefficiency.
Ah. But if all jobs were paid the same, would you go to university (wouldn't you take a job right away)? How would we have progress? Who would be the risk takers if there were no great incentives to take entrepreneurial risks?
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Juwel
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(Original post by Linda)
Ah. But if all jobs were paid the same, would you go to university (wouldn't you take a job right away)? How would we have progress? Who would be the risk takers if there were no great incentives to take entrepreneurial risks?
That's about a planned economy. I was thinking more along the lines of the perfect competition model, the most efficient (and hence less market-failure ridden) market structure. Just compare unequal distribution and its implications to the perfect competition model.
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Linda
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(Original post by ZJuwelH)
That's about a planned economy. I was thinking more along the lines of the perfect competition model, the most efficient (and hence less market-failure ridden) market structure. Just compare unequal distribution and its implications to the perfect competition model.
please, enlighten me.
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Jonatan
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(Original post by ZJuwelH)
That's about a planned economy. I was thinking more along the lines of the perfect competition model, the most efficient (and hence less market-failure ridden) market structure. Just compare unequal distribution and its implications to the perfect competition model.
Be carefull to precisise what you mean with an unequal distribution here. I dont think the optimal income distribution is where everyone has the same income. Such a situation would simply not be stable. The question is where the optimum lies, and thsu whether a country should have a more equal or unequal income distribution depends on where it is at relative to the optimal distribution.
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Linda
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(Original post by ZJuwelH)
It is, as it encourages the apathy of resources. Rich people tend to save more of their money, and this removes from the economy and removes the economic resource of money. The money could be used to produce this, that and t'other, or be spent in the economy and encourage economic growth and employment (the resource of labour) etc. It's a market failure as it stops all resources being utilised and hence encourages inefficiency.
And why is saving bad? just look at investment...
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Juwel
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(Original post by Linda)
please, enlighten me.
I'm thinking along the lines that unequal income distribution would mean a small portion of the population have a large portion of its income, an oligopoly or monopoly on income is how I thought of it. This causes inefficiency as not all resources are utilised...

The perfect competition model basically says that all firms in a market deal in the same goods, no firm is big enough to set prices, and so all firms compete on price terms only. This means that to gain a greater market share firms have to lower prices, and costs and be more efficient. I know income distribution doesn't really relate to firms but I thought that outside of perfect competition firms do not have to use all resources (hence inefficiency), just as with unequal distribution of income households do not hae to spend all their money... or something...
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Juwel
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(Original post by Linda)
And why is saving bad? just look at investment...
Saving is bad as the money that is saved could be invested or spent, and create economic growth. Saving reduces the good of economic growth.
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Juwel
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(Original post by Jonatan)
Be carefull to precisise what you mean with an unequal distribution here. I dont think the optimal income distribution is where everyone has the same income. Such a situation would simply not be stable. The question is where the optimum lies, and thsu whether a country should have a more equal or unequal income distribution depends on where it is at relative to the optimal distribution.
I'm not thinking about an optimal distribution, just that unequal distribution can mean inefficiency in the market...
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Linda
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(Original post by ZJuwelH)
Saving is bad as the money that is saved could be invested (...) and create economic growth.
What do you think happens to the money in the bank eh? It just lies there?
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It'sPhil...
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(Original post by Linda)
And why is saving bad? just look at investment...
Investment is nothing like saving. Saving is a withdrawal from the economy and as such will have a negative multiplier effect on growth, however investment is essential for maintaining healthy AD and growth. In terms of inequal income distribution of income, it is a market failure as unfair distribution leads to poverty and poverty is the largest source of unemployment. Also there is the equity issue where it is clearly not a good state of affairs where the richest few hold most of the wealth. You may find it useful to research the Lorenz curve and Gini coefficient as these are measures of inequality through wage differentials
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Juwel
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(Original post by Linda)
What do you think happens to the money in the bank eh? It just lies there?
It's not spent immediately, the fact it if it isn't spent it's being withdrawn from the economy, and It'sPhil has elaborated further. Investment is actually the direct opposite of saving.
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Linda
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(Original post by ZJuwelH)
It's not spent immediately, the fact it if it isn't spent it's being withdrawn from the economy, and It'sPhil has elaborated further. Investment is actually the direct opposite of saving.
funny, my textbook says that savings is a form of investment. guess why? because the banks INVEST it.
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elpaw
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(Original post by Linda)
funny, my textbook says that savings is a form of investment. guess why? because the banks INVEST it.
but you invest it aswell, because you get interest on them
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Juwel
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(Original post by Linda)
funny, my textbook says that savings is a form of investment. guess why? because the banks INVEST it.
Ah but the person actually making the saving isn't the one investing it. So it's a saving to one but an investment to another, not one a form of another.
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