Market Failure of Inequality and Poverty

In a market economy an Individual’s ability to consume goods & services depends upon his/her Income or other resources such as savings An unequal distribution of income and wealth may result in an unsatisfactory allocation of resources and can also lead to alienation and encourage crime with negative consequences for the rest of society The free-market system will not always respond to the needs and wants of people with Insufficient economic votes to have any impact on market demand. What matters in a market based system is your effective demand for goods and services.

Examples of inequality/poverty: The distribution of income in the UK. In 2008/09, Income before taxes and benefits of the top fifth of households In the UK was EYE,800 per year on average compared with в?5,000 for the bottom fifth, a ratio of 1 5 to one. After taking account of taxes and benefits, the gap between the top and the bottom fifth was reduced with average income of EYE,900 per year and EYE,600, respectively, a ratio of four to one. This shows that the tax and benefits system works In a progressive way to reduce the scale of Income inequality.

In the K, the share of total income earned by the top 1% income earners rose from 6% in 1975 to 14% in 2005 The gap between lowest and higher income groups can be seen in this chart below: Another way of showing this Income data Is In the table below – this shows the distribution of disposable income by household income quintile. The data is for 2008-09. Bottom Fifth Next Fifth Middle Fifth Top Filth % share of disposable Income 7 1 OFF 16 42 Suggested solutions to solving the market failure: 1 .

Changes to the tax and benefits system: For example, increases in higher rates of income tax would make the British tax system more progressive and reduce the post- tax incomes of people at the top of the income scale. The risk is that higher rates of taxation may act as a disincentive for people to earn extra income and might damage enterprise and productivity. 2. A switch towards greater means-tested benefits: Means testing allows welfare benefits to go to those people and families in greatest need. A means-test involves a check on the financial circumstances of the benefit claimant before paying any benefit out.

This would help the welfare system to target alp for those households on the lowest incomes. However means tested benefits are often unpopular with the recipients. 3. Linking the state retirement pension to average earnings rather than prices: This policy would help to relieve relative poverty among low-income pensioner households. Their pension would rise in line with the growth of average earnings each year 4. Special employment measures: Government employment schemes seek to raise employment levels and improve the employment prospects of the long-term unemployed.

Increased spending on education and raining: Unemployment is a cause of poverty and structural unemployment makes the problem worse. There are millions of households in the I-J where no one in the family is in any kind of work and this increases the risk of poverty. 6. The National Minimum Wage: The National Minimum Wage (NNW) was introduced in April 1999 – employers cannot legally undercut the NNW. Since 1999, the beneficial impact of the minimum wage has been concentrated on the lowest paid workers in service sector jobs where there is little or no trade union protection.