Holt 7525-9 S15_IT

Chapter 31 Income Distribution and Redistribution
The basic economic problem is scarcity. Human wants are unlimited. Resources are limited. The
basic goal in dealing with the problem of scarcity is to produce as much consumer satisfaction as
possible with the limited resources available. Two elements are necessary to achieve this goal:
1. Producing the greatest quantity possible of the combination of goods that provides the
greatest consumer satisfaction.
2. Achieving the distribution of income that will yield the greatest total utility for society.
A market economy is ideal for accomplishing the first element. But the unequal distribution of
income in a market economy will probably not yield the greatest total utility for society. This
chapter examines income distribution and redistribution.
Some Income Distribution Facts
Ask the average person what U.S. GDP is, and they are unlikely to know with any precision. Ask
the same person what their own income is, and they are likely to know very precisely. Most
people are less concerned about National Income than they are about their own income. Most
people care less about the size of the whole economic pie than about the size of their slice.
In a market economy, income is distributed based on the productivity of resources. The resources
owned by different households are not all of the same productivity. So the income distribution is
unequal. But just how unequal is income distribution in the U.S.? The table below shows the
share of total money income received by different groups of households, ranging from the Lowest
Income 20% of households to the Highest Income 20% of households, for the year 2013. The
table also shows the income range for each Household Income Group. The information is from
the U.S. Census Bureau.
Household
Percentage of
Income Group Total Money Income Income Range
Lowest 20% 3.2% $0 – 20,900
Second 20% 8.4% $20,901 – 40,187
Third 20% 14.4% $40,188 – 65,501
Fourth 20% 23.0% $65,502 – 105,910
Highest 20% 51.0% $105,911 and up
The table above shows that the Highest Income 20% of households have almost 16 times the
share of total money income as the Lowest Income 20% of households. (51.0 ÷ 3.2 = 15.9)
Economic Mobility
There is significant economic mobility in the U.S. economy. We should not assume that the
Household Income Groups consist of the same households over time. Over a typical ten year
period, fewer than half of the households in the Lowest Income 20% will remain in that Group.
Most will move up to one of the four higher Income Groups.
Example 1: Research by Mark Rank and Thomas Hirschl found that 73% of Americans between
the ages of 25 and 60 will spend at least one year in the Highest 20% Household Income Group
and 12% will spend at least one year in the top 1% of income earners. Research by Raj Chetty, et
al. indicates that intergenerational income mobility has remained steady in recent decades.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
The Lorenz Curve
The degree of income inequality can be expressed with a Lorenz curve. A Lorenz curve
contrasts the actual distribution of income with perfect equality.
31 - 1 Income Distribution and Redistribution