Policies to alleviate poverty and redistribute income: progressive taxation

Unit 1 – The Basic Economic Problem & Production Possibilities

1.1 Scarcity, Choice & Opportunity Cost

• Scarcity: limited resources vs unlimited wants – the core economic problem.
• Choice: societies must decide what to produce, how to produce and for whom.
• Opportunity Cost: the value of the next best alternative fore‑gone when a choice is made.

1.2 Production‑Possibility Curve (PPC)

• Shows maximum output combinations of two goods when all resources are efficiently employed.
• Points on the curve = efficient; inside = under‑utilisation; outside = unattainable with current resources.
• Shape:

  • Bow‑shaped → increasing opportunity cost (more of one good requires increasingly larger sacrifices of the other).
  • Straight line → constant opportunity cost.

Diagram – PPC (description)

Draw a graph with Good A on the x‑axis and Good B on the y‑axis. A bowed‑out curve illustrates increasing opportunity cost. Label points “Efficient”, “Inefficient” and “Unattainable”.

1.3 Factors that Shift the PPC

Unit 2 – Allocation of Resources (Markets & Government Intervention)

2.1 Demand and Supply

• Law of Demand: price ↑ → quantity demanded ↓ (ceteris paribus).
• Law of Supply: price ↑ → quantity supplied ↑ (ceteris paribus).
• Market equilibrium = intersection of demand and supply curves.

2.2 Determinants of Demand

• Income (normal vs inferior goods)
• Prices of related goods (substitutes & complements)
• Tastes & preferences
• Expectations of future prices
• Number of consumers

2.3 Determinants of Supply

• Input prices (labour, capital, raw materials)
• Technology
• Number of sellers
• Expectations of future prices
• Taxes & subsidies

2.4 Elasticities

2.5 Market Failure & Government Intervention

• Externalities – positive (e.g., education) or negative (e.g., pollution). Government can tax negative externalities or subsidise positive ones.
• Public goods – non‑rival & non‑excludable (e.g., national defence). Usually provided by the state.
• Information asymmetry – e.g., used‑car market; can be reduced by regulation.
• Market power – monopoly or oligopoly leading to higher prices; addressed by competition policy.

Diagram – Price ceiling & floor (description)

Show a supply‑demand graph with a ceiling set below equilibrium (creates shortage) and a floor set above equilibrium (creates surplus).

Unit 3 – Micro‑Decision‑Makers

3.1 Households – Utility Maximisation

• Utility = satisfaction from consumption.
• Consumers allocate income to maximise total utility subject to the budget constraint:
  \(PX X + PY Y = I\).
• Optimal point where the highest indifference curve is tangent to the budget line – marginal rate of substitution (MRS) = price ratio \(\frac{PX}{PY}\).

3.2 Firms – Profit Maximisation

• Profit = Total Revenue – Total Cost.
• Short‑run: maximise profit where marginal cost (MC) = marginal revenue (MR). If MR < AVC, shut‑down.
• Long‑run: firms in perfect competition earn zero economic profit where MC = ATC = MR = P.

3.3 Market Structures

3.4 Money & Banking (brief link to macro)

• Money = medium of exchange, store of value, unit of account.
• Central bank controls money supply via open‑market operations, reserve requirements, and policy interest rates.

Unit 4 – Government, Fiscal & Monetary Policy & Macro‑economic Objectives

4.1 Macro‑economic Aims

• Economic growth (increase in real GDP)
• Low unemployment
• Low inflation
• Equitable distribution of income
• External balance (stable current account)

4.2 Fiscal Policy

• Government spending (G) – directly raises aggregate demand.
• Taxation – reduces disposable income; can be progressive, proportional or regressive.
• Expansionary fiscal policy: increase G or cut taxes → AD ↑.
• Contractionary fiscal policy: decrease G or raise taxes → AD ↓.

Progressive Taxation (see detailed section in Unit 5)

4.3 Monetary Policy

• Tools: policy interest rate, open‑market operations, reserve ratio.
• Expansionary: lower interest rates → investment ↑, consumption ↑, AD ↑.
• Contractionary: raise rates → investment ↓, AD ↓.

4.4 Supply‑Side Policies

• Improving education & training, reducing regulation, tax incentives for investment.
• Goal: increase LRAS (long‑run aggregate supply) → higher potential output.

4.5 Unemployment Types

4.6 Inflation Measurement

• Consumer Price Index (CPI) – weighted average of price changes for a basket of goods & services.
• Inflation rate formula: \(\displaystyle \frac{CPI{t}-CPI{t-1}}{CPI_{t-1}}\times100\%.\)

4.7 Recession

• Definition: two consecutive quarters of negative real GDP growth (or a significant fall in output, employment and income).
• Causes: fall in consumer confidence, sharp fall in investment, external shocks.
• Consequences: higher unemployment, lower tax revenue, increased poverty, possible deflation.
• Policy response: expansionary fiscal & monetary measures, targeted job‑creation programmes.

Unit 5 – Economic Development (Living Standards, Poverty, Population, Differences Between Countries)

5.1 Living Standards

5.1.1 Key Indicators

• Real GDP per head – average value of goods & services produced per person, adjusted for inflation.
• Human Development Index (HDI) – composite of life expectancy, education (mean & expected years of schooling) and GNI per capita.

5.1.2 Advantages & Disadvantages

5.1.3 Worked Example

Country A: Real GDP per head = US$30 000, HDI = 0.85 (high).

Country B: Real GDP per head = US$5 000, HDI = 0.45 (low).

The contrast shows that higher income usually accompanies better health and education, but a modest rise in income does not automatically improve living standards if health or education remain poor.

5.2 Poverty

5.2.1 Definitions

• Absolute poverty – a fixed monetary threshold (e.g., US$1.90 a day) below which basic needs cannot be met.
• Relative poverty – household income < 60 % of the national median; measures social exclusion.

5.2.2 Numerical Illustration

If the median weekly income in Country X is £500, a household earning less than £300 (60 % of £500) is relatively poor. An absolute‑poverty line of £100 per week would identify anyone unable to afford a basic diet.

5.2.3 Main Causes (syllabus list)

1. Unemployment or under‑employment
2. Low wages
3. Illness or disability
4. Age (very young or very old)
5. Environmental factors (natural disasters, poor housing)

5.2.4 Policies to Alleviate Poverty & Redistribute Income

5.2.5 Progressive Taxation – Detailed Study

What is it?

A direct tax system where the *marginal* tax rate rises as income rises, so the *average* tax rate also increases with income. It is a principal tool for income redistribution.

How it works – step‑by‑step

1. Divide taxable income into brackets (low, middle, high).
2. Assign a higher marginal rate to each higher bracket.
3. Tax each portion of income that falls within a bracket and add the amounts.

Illustrative calculation

Assume the following brackets:

• 0 % on income up to $10 000
• 10 % on income \$10 001 – \$30 000
• 20 % on income \$30 001 – \$70 000
• 30 % on income above $70 000

Tax payable by someone earning $85 000:

\[

\begin{aligned}

\text{Tax} &= 0\% \times 10{,}000 \\

&\;+\;10\% \times (30{,}000-10{,}000) \\

&\;+\;20\% \times (70{,}000-30{,}000) \\

&\;+\;30\% \times (85{,}000-70{,}000) \\

&= 0 + 2{,}000 + 8{,}000 + 4{,}500 = \$14{,}500

\end{aligned}

\]

Advantages

• Reduces income inequality by shifting resources from high‑ to low‑income groups.
• Provides a stable revenue base for public services (education, health, social security).
• Acts as an automatic stabiliser – tax receipts fall when incomes fall, leaving more disposable income in the economy.

Disadvantages

• High marginal rates may discourage work effort, saving or investment among high earners.
• Complex brackets increase administrative costs and the risk of errors.
• Scope for tax avoidance/evasion, especially where enforcement is weak.

Key Design Considerations

1. Bracket thresholds – should reflect cost‑of‑living and the national poverty line.
2. Rate setting – balance revenue needs with incentives for work and investment.
3. Administration – transparent, efficient collection reduces evasion.
4. Use of revenue – earmark for programmes that directly help low‑income households (cash transfers, subsidised schooling).
5. Monitoring & evaluation – regularly assess impact on poverty and adjust rates or thresholds as required.

Suggested Diagram

5.3 Population

5.3.1 Key Demographic Rates (with formulae)

5.3.2 Factors Affecting Population Growth (syllabus list)

• Fertility determinants: cultural/religious values, access to contraception, female education, child‑mortality rates.
• Mortality determinants: health care, nutrition, disease prevalence, sanitation.
• Migration determinants: employment opportunities, political stability, environmental factors.

5.3.3 Effects of Population Size & Structure

• High growth can strain education, health, housing → higher poverty risk.
• Youthful age structure → potential “demographic dividend” if jobs are available; otherwise higher unemployment.
• Aging population → greater demand for pensions & health care, pressure on public finances.

5.3.4 Optimum Population

A theoretical size at which a country can provide a decent standard of living for all residents without exhausting natural resources. It is a benchmark, not a precise figure.

5.3.5 Population Pyramid (description)

Draw a vertical bar chart with age groups on the vertical axis and population size on the horizontal axis. A wide base indicates high birth rates (young population); a narrow base and wide top indicates low birth rates and an ageing population.

5.3.6 Unemployment Rate – Calculation

\[

\text{Unemployment rate} = \frac{\text{Number of unemployed}}{\text{Labour force}} \times 100\%

\]

Labour force = employed + unemployed (people actively seeking work).

5.3.7 Seasonal Unemployment (explicit requirement)

• Occurs when demand for labour fluctuates with the season (e.g., tourism, agriculture).
• Usually short‑term; can be mitigated with off‑season training programmes or wage subsidies.

5.4 Differences in Economic Development Between Countries

5.4.1 Determinants (syllabus list)

• Productivity of labour and capital
• Sectoral structure (agriculture, manufacturing, services)
• Savings and investment rates
• Physical resources (natural resources, infrastructure)
• Human resources – education and health

5.4.2 Comparative Paragraph (example)

Country A has abundant natural resources, a well‑developed transport network and a high secondary‑school enrolment rate. Its manufacturing sector is modern, its savings rate is 25 % of GDP and labour productivity is high, giving a real GDP per head of US\$40 000 and a low poverty rate. Country B relies heavily on low‑productivity agriculture, has poor road infrastructure, low school enrolment and a savings rate of only 10 % of GDP. Consequently its real GDP per head is US\$6 000 and a large share of the population lives in absolute poverty.

5.4.3 Link to Poverty

Higher productivity and better education raise incomes, reducing both absolute and relative poverty. Conversely, dependence on low‑productivity agriculture and poor health services tend to keep poverty rates high.

5.5 Cross‑Topic Links

• Fiscal policy – Progressive taxation is a direct‑tax tool that helps achieve the macro‑economic aim of equitable distribution of income.
• Macro‑economic aims – Reducing inequality supports social stability, a key development goal.
• Globalisation – Tax competition can limit how progressive a tax system can be; multinational corporations may shift profits to low‑tax jurisdictions, affecting revenue for poverty‑reduction programmes.
• International aid – Grants and loans can supplement domestic tax revenue to fund health, education and infrastructure in poorer countries.

Unit 6 – International Trade & Globalisation

6.1 Specialisation & Comparative Advantage

• Countries should specialise in producing goods where they have a lower opportunity cost.
• Trade allows each country to consume beyond its own PPC.

Diagram – Gains from Trade (description)

Two‑country PPC diagram showing each country’s consumption possibilities before trade (on its own PPC) and after trade (point on a higher indifference curve reachable via exchange).

6.2 Free Trade – Advantages & Disadvantages (syllabus list)

6.3 Trade Restrictions

• Tariffs – tax on imports; raises domestic price, protects local producers.
• Quotas – limit on the quantity of a good that can be imported.
• Subsidies – government payments to domestic producers to lower their costs.
• Import licences – administrative control over quantities imported.

6.4 Balance of Payments (BOP)

• Current account – trade in goods & services, income, transfers.
• Capital & financial account – foreign investment, loans, reserves.
• Surplus = exports > imports; deficit = imports > exports.

6.5 Globalisation – Wider Impacts

• Increased movement of goods, services, capital and labour.
• Potential for faster economic growth but also greater exposure to external shocks.
• Tax competition can limit the progressivity of domestic tax systems.
• Multinational corporations may shift profits to low‑tax jurisdictions, reducing tax revenue for poverty‑reduction programmes.

Syllabus Checklist (Units 1‑6)

Summary

Progressive taxation, combined with education, health, cash‑transfer programmes and a well‑designed minimum wage, forms a powerful fiscal package for reducing poverty and narrowing income inequality. When these policies are integrated with sound macro‑economic management (stable growth, low inflation, low unemployment) and an open but regulated trade regime, countries can move towards higher living standards, a more equitable distribution of income and sustainable economic development.