How does a society or a country make the decision about the tradeoff between equality and economic output? Hint: Think about the political system.

The tradeoff between income equality and economic output is a phenomenon which talks about how policy decisions promoting economic equality will lead to generally lower economic output, and vice versa.

If government policies aim at reducing income inequality, they would focus on redistribution of income through income taxation, anti poverty policies to treat and cure policy trap. But, this has an adverse, unwanted repercussion that the workers would be discouraged to work if majority of income is taxed and would rather want to avail the benefits of government policies freely.

Similarly, if policies focus on encouragement towards growth of economic output, a majority of contribution comes from the upper-income sections of the society. Thus making rich richer and poor poorer, leading to income inequality.

But policies like free education will support both economic output and income equality as it would lead to creation of skilled labor. Such policies get political support, and if such steps are not taken the society may revolt against the market forces.

Hence, policies that support poverty eradication and also gain social support are likely to contribute positively to the economic output.