What is the Tradeoff between Incentives and Income Equality?
Government policies to reduce poverty or to encourage economic equality, if carried to extremes, can injure incentives for economic output. The poverty trap, for example, defines a situation where guaranteeing a certain level of income can eliminate or reduce the incentive to work. An extremely high degree of redistribution, with very high taxes on the rich, would be likely to discourage work and entrepreneurship. Thus, it is common to draw the tradeoff between economic output and equality.
In this formulation, if society wishes a high level of economic output, it must also accept a high degree of inequality. Conversely, if society wants a high level of equality it must accept a lower level of economic output because of reduced incentives for production.
Related Topics
- Market Competition and Innovation
- New Technology and Positive Externalities
- Externality
- Network Externality
- Pigovian Tax
- Coase Theorem
- Agglomeration Diseconomies
- Education – Private and Social Rate of Return
- Government Approaches to Encouraging Innovation
- Public Good
- Public, Private, Club, Common Goods
- Excludable and Rivalrous Goods
- What is the Free Rider Problem for Public Goods?
- Free Rider
- Social Loafing
- Role of Government in Paying for Public Goods
- What is the Tragedy of Commons for Common Resources?
- Income Inequality
- Poverty Line?
- Poverty Trap
- Public Safety Net
- Measuring Income Inequality
- Lorenz Curve
- Ladder of Opportunity
- Tradeoff between Incentives and Income Equality