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Chapter 17: Problem 3

What is the marginal productivity theory of income distribution?

Short Answer

Expert verified
The Marginal Productivity Theory of Income Distribution states that in a competitive market, factors of productions would achieve payment equivalent to the marginal productivity they contribute. Its implications suggest an equitable distribution of income assuming perfect market conditions which, however, are rarely met in real-world scenarios.

Step by step solution

01

Understanding basic concepts

First, understand the meaning of marginal productivity. Marginal productivity is the extra output that an additional unit of an input can produce when all other factors are constant. In this context, we are talking about the distribution of income amongst different factors like labor, capital, land, entrepreneurship.
02

The Principle of the Theory

Secondly, understand the principle of the Marginal Productivity Theory of Income Distribution. Essentially, it states that in a free market, each factor involved in the production process is paid according to the value of its marginal output. That is, each factor is rewarded according to the value of the product the last unit of the factor produced.
03

The Implication of the Theory

Lastly, examine the implications of the theory. In a perfectly competitive marketplace, the theory suggests that income is distributed equitably, as there exists a direct relationship between a factor's remuneration and its productivity. However, in the real world, marketplace distortions like monopolistic conditions and market imperfections introduce inequalities in income distribution.

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