ECON 201 1st Edition Lecture 18Outline of Last Lecture I. Public Policies toward Externalitiesa. Definition of command-and-control policyb. Definition of market-based policyc. Definition of corrective taxII. Comparing and Contrasting the PoliciesIII. Private Solutions to Externalitiesa. Definition of Coase theoremIV. Why Private Solutions Do Not Always WorkV. Povertya. Definition of povertyb. Definition of poverty linec. Definition of poverty rateOutline of Current Lecture I. Poverty vs. Income InequalityII. The Lorenz Curvea. Definition of Lorenz curveIII. Explanations for Rising InequalityIV. Policies to Improve InequalityV. Poverty Trap and Global Povertya. Definition of poverty trapCurrent LectureI. Poverty vs. Income InequalityThe difference between poverty and income inequality is simple: poverty is a line that defines a certain percent of the population as living in poverty while income inequality is an unequal distribution of income. Income inequality is measured by the Lorenz curve. It is important to keep in mind that wealth inequality is greater than income inequality. II. The Lorenz CurveThe Lorenz curve is a graph that compares the cumulative income actually received to a perfectly equal distribution of income. It shows the share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis. Figure 14.8 in OpenStax shows the Lorenz curve for 2011. In 1967, the lowest 20% of households had 4% of the These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.income; now, the lowest 20% of households have 3.2% of the income. Over time, then, the lower quintiles are losing their cumulative share of income. The more equal the quintiles are, the closer the Lorenz curve will be to the perfect equality line. III. Explanations for Rising InequalityThere are multiple reasons that explain why income inequality is rising. Households have been changing in the past few decades; now, many professions are opened to both sexes which was not always the case before, and people tend to marry within their income. Doctors marry other doctors and this increases high-end income. The labor markets are also changing; college degrees are becoming more and more pivotal to earning a high income. The result of globalization is that low cost labor anywhere is now the competition for low cost workers, and this has taken more of the lower income jobs. These are just a few of the reasons why income inequality is on the rise. IV. Policies to Improve InequalityThere are many policies that improve inequality, such as minimum wage laws, assistance to the poor through TANF (Temporary Assistance for Needy Families) or SNAP (Supplemental Nutrition Assistance Program) as well as in-kind transfers. The tax policy helps as well in ways such as negative income tax and EITC (Earned Income Tax Credit).V. The Poverty Trap and Global PovertyThe poverty trap occurs when antipoverty programs are set up so that government benefits decline substantially as people earn more income. As a result of this, working provides little financial gain. If a person works and the government then takes away their poverty aid based onhow much they work, then it discourages people against working if they can get it for free from the government anyway. Global poverty is in an even worse condition than U.S. poverty; the world poverty line estimates that many people live off of $1.25 per day per person. In the United States, the poverty line is greater than $16 per day per
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