Question

In: Economics

1. what are one or two convincing reasons for the increase in income inequality over the...

1. what are one or two convincing reasons for the increase in income inequality over the last 35 years (approximately)?

2. The NPR piece presents a debate between two Nobel laureate economists concerning inequality. Becker argues for a ‘good kind of inequality’, Solow begs to differ. Can inequality ever be “good”? Why or why not?

3. Currently, the ratio of the mean income of the Richest 20% of households to the mean income for the Poorest 20% of households is approximately 17:1 – meaning, on average, for every dollar a household in the poorest quintile makes, a household in the richest quintile makes 17. If you were in charge of distributing income in the U.S., what would be your ratio? Why?

Solutions

Expert Solution

1. A few convincing reasons for inequality are-

  • Difference in education- It has been very clearly established that in the labor market, education is directly correlated with income. The higher the education, usually the higher the income. This is because education is considered to impart people with knowledge and ability. And usually the more a person studies, the deeper and specialized the knowledge is considered to be. For example, an MBA is considered to be an expert in the management field. A PhD in any field is considered an expert in that field. As these people are considered experts, their expertise is highly sought after and hece highly paid.
  • Better technology- As technology improves, it imparts greater efficiency to production but also leaves many jobless or with lower pay. A new machine that can be operated by a computer or only needs one person will reduce costs for the producer, but at the same time will leave a few people out of the market. This means that the producer will be richer while the labors will be poorer- this increase income inequality.

2. Inequality can be good wen it increases the whole size of pie and not just takes from the poor and transfers it to the rich. For example, lets say the total GDP of a country is 100. Currently the richest person owns 20. Now, if he opens a new factory that increasese the GDP to 150 and he becomes richer by 20 (that is, he is now worth 40), while the inequality did increase, it also resulted on the total income of others increasing from 80 to 110. Thus, the total pie was grown and not just transfered from poor to rich.

If inequality happens this way, it can be good as it increases income and opportunities for all. A rising tide lifts all. But if its just transfer from poor to rich in the same pie, then its bad.

3. A growing and capitalist society will always hafve a high ratio from richest to poorest quintile. Increasing income is the primary motivation for many innovations and business establishments and hence, as explained in part B, inequality is not neccessarily a bad thing. But yes, the ratio of these quintiles shouldnt be extremely high.

In my opinion, the ratio should be somwhere close to 10. This is because while this ratio is still high enough for it to matter (that is, people will be encouraged to work hard so that they can achieve that level of income), but not so high that it completely leaves the poor out of the possibility of getting the opportunity to become better off.

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Please upvote if you like my answer. Thank you.


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