Chapter 15: Problem 26

What are some reasons why a certain degree of inequality of income would be expected in a market economy?

Short Answer

Expert verified

In a market economy, income inequality can be expected due to varying education, skills, and experience; risk-taking and entrepreneurship; inherent market imperfections and inequalities; globalization and technological advancements; and government policies. These factors contribute to differences in productivity, opportunities, and income growth, leading to a certain degree of income inequality in a market-driven economic system.

Step by step solution

1. Varying Education, Skills, and Experience

: In a market economy, individuals have different levels of education, skills, and experience which affect their productivity. Those with higher education, specialized skills, and more experience are able to command higher wages as they contribute more to the production process. This difference in productivity leads to income inequality.

2. Risk-Taking and Entrepreneurship

: Entrepreneurs and investors take on risks in starting and growing businesses, and in making investments in a market economy. Those who are successful in taking calculated risks and managing their businesses efficiently are likely to accumulate higher levels of income compared to those who are not as successful or risk-averse. This rewards risk-taking and entrepreneurship, which is a driver of income inequality.

3. Inherent Market Imperfections and Inequalities

: A market economy is not perfectly efficient, and various market imperfections, such as imperfect information, externalities, or unequal access to resources, can contribute to income inequality. For example, individuals from wealthier families may have better access to quality education, information, and financial resources, providing them with advantages in the labor market and investment opportunities. These advantages are often inherited, passing down from one generation to the next, creating persistent income inequality.

4. Globalization and Technological Advancements

: Globalization and technological advancements have transformed the market economy, benefitting certain sectors of the economy more than others. Highly skilled workers and those in industries with growing global demand are likely to see higher income growth. On the other hand, lower-skilled workers and those in industries with declining demand due to automation and offshoring may experience stagnating or declining incomes. This shift contributes to income inequality.

5. Government Policies

: In a market economy, government policies can also contribute to income inequality. Some policies, such as taxes and social welfare programs, can work towards reducing income inequality by redistributing income. However, other policies may inadvertently contribute to inequality, such as when regulations or tax loopholes disproportionately benefit certain segments of the population or protect industries with higher wages.