Assess the view that ‘some level of inequality is desirable to maintain an appropriate incentive structure in the economy’

A-Level Economics Paper 2 June 2018 Extract

Assess the view that ‘some level of inequality is desirable to maintain an appropriate incentive structure in the economy’ (Extract B, lines 19 and 20). (10 marks)

On the one hand, inequality can be desirable to some extent. Some level of income inequality helps people to understand that there is a higher salary or reward for jobs that are more difficult, more stressful or that require more skills. This incentivises people to gain the skills that can both be rewarding to them, whilst also being required by society. Extract B mentioned maintaining an appropriate 'incentive structure' in society. Higher skills leads to higher levels of productivity, which can lead to higher rates of both actual and potential economic growth. This means that real gdp and therefore real gdp per capita should increase, which means that people throughout society should be able to enjoy improvements in living standards. As the economy grows, the government are also able to increase tax revenue through income taxes, corporation taxes and indirect taxes like VAT, which can be redistributed through higher quality public services like police, healthcare and education, which can lead to a safer, healthier and more knowledgable society. Extract B mentioned that 'poverty can be reduced through higher average growth'.

On the other hand, inequality can be undesirable for society. As inequality increases, this might create social tensions, which can lead to further problems such as more crime. Low income households are also more likely to eat cheaper, junk food and spend less time exercising due to longer working hours or higher levels of stress. Additionally, those on lower incomes are likely to be less motivated and therefore less productive at work if they cannot see an easy path to higher income, and therefore will continue to consume less goods and services. All of these factors can contribute to a less productive economy with slower growth and more strain on the government’s budget, especially in terms of payments towards welfare and healthcare. 

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