Equity in Income Distribution: IB Economics 2.12 notes

Equity versus equality

Equity means fairness in how income and wealth are distributed, and it is one of the nine key concepts. It is not the same as equality. Equality means everyone receives an identical share, whereas equity asks whether the distribution is fair, which may still involve unequal rewards for different effort, skill, or risk.

Most economists accept some inequality as fair, for example paying a surgeon more than a trainee, while judging extreme inequality inequitable. Because fairness is a normative judgement, equity is contested, which is why the topic pairs a value question with objective measurement tools.

The Lorenz curve

The Lorenz curve plots the cumulative share of total income on the vertical axis against the cumulative share of the population, ranked from poorest to richest, on the horizontal axis. A 45-degree diagonal, the line of equality, shows perfect equality: the poorest 20 percent would earn exactly 20 percent of income.

Real distributions bow below this line because poorer groups earn less than their population share. The further the curve sags from the diagonal, the more unequal the distribution. Comparing two countries, the one whose Lorenz curve lies further from the line of equality is more unequal.

Reading a Lorenz curve and the Gini coefficient

Take a worked example by quintiles. Suppose the poorest 20 percent earn 5 percent of income, so cumulative income reaches 5 percent. The next quintile earns 10 percent, taking the cumulative total to 15 percent at 40 percent of the population. The middle quintile earns 15 percent, reaching 30 percent; the fourth earns 25 percent, reaching 55 percent; and the richest 20 percent earn the remaining 45 percent, reaching 100 percent.

The Gini coefficient turns this into one number: the area between the line of equality and the Lorenz curve, divided by the whole area under the line of equality. Using the trapezium rule, the area under this Lorenz curve is 0.31, so the area between the curves is 0.5 minus 0.31 = 0.19. Dividing by 0.5 gives a Gini of 0.38.

A Gini of 0 means perfect equality and 1 means one person holds all income, so higher values mean more inequality. For scale, Slovenia and the Nordic countries sit near 0.25, the United States around 0.40, and South Africa around 0.63, one of the highest in the world.

Causes of inequality

Income inequality has several sources. Differences in human capital, from education and skills, produce wage gaps, while ownership of wealth-generating assets such as property, shares, and land concentrates income among those who already hold capital. Inheritance passes this advantage across generations.

Other causes include discrimination in labour markets, differences in market power, the erosion of trade union bargaining, and technological change or globalisation that rewards high-skill workers while displacing routine jobs. Government policy itself shapes the distribution through how progressive or regressive its taxes and transfers are.

Redistribution tools and their trade-offs

Progressive taxation charges a higher average tax rate as income rises, so the rich pay a larger proportion, which narrows the after-tax distribution. Transfer payments, such as pensions, unemployment benefits, and child support, raise the incomes of the poorest without any good or service in return. A minimum wage lifts the pay of low-paid workers directly.

Each tool carries a trade-off, linking equity to the efficiency key concept. Very high marginal tax rates can weaken the incentive to work, save, or invest, and may encourage tax avoidance. Generous transfers can create dependency if poorly designed, and a minimum wage set above the market-clearing wage can raise unemployment among low-skilled workers. The equity-efficiency trade-off is the central evaluation point in this topic.

Real-world example

Brazil illustrates redistribution in practice. Its Bolsa Familia programme, a conditional cash transfer paying poor families provided their children attend school and receive vaccinations, reached tens of millions of people and is credited with helping lower Brazil's Gini coefficient over the 2000s, though it remained high at around 0.5.

The conditionality also builds human capital, tackling a cause of inequality rather than only its symptom. This shows how a single policy can combine a transfer with an investment in future earning power, which is a strong evaluation point when weighing redistribution tools.

Common Paper mistakes

Do not treat equity and equality as synonyms; equality is an equal split, equity is fairness, and the distinction is often worth an explicit sentence. When describing a Lorenz curve, remember the population is ranked poorest to richest and the curve always lies on or below the line of equality.

State the Gini as a number between 0 and 1 where higher means more unequal, and never confuse it with the poverty rate. In evaluation, always bring in the equity-efficiency trade-off rather than assuming redistribution is costless.

How this is examined

• This HL-only topic (with links to macro policy in 3.4) appears on Paper 2 data response, where you may be asked to read a Lorenz curve or compare Gini coefficients from a source. State clearly that a curve further from the diagonal, or a higher Gini, means more inequality.
• Paper 3 (or Paper 2) can ask you to interpret a Gini coefficient or read a Lorenz curve: a higher Gini or a curve further from the diagonal means more inequality. Calculating the Gini itself is beyond the IB quantitative requirements; the worked calculation here is illustrative only.
• Evaluation marks hinge on the equity-efficiency trade-off. For every redistribution tool, name a benefit and a cost, such as progressive tax reducing inequality but possibly weakening work incentives.
• Distinguish equity from equality explicitly in definitions; examiners reward candidates who show equity is a fairness judgement, not an equal split.

Key terms

lorenz curvegini coefficientprogressive taxtransfer paymentminimum wage