Evaluating Policy Proposals to Reduce Income Inequality
Consider a small economy with three individuals whose annual incomes are $10,000, $30,000, and $80,000. The government is considering two different policies to reduce income inequality.
Policy A: A 'Robin Hood' tax and transfer. The government will tax the wealthiest individual $10,000 and transfer that exact amount to the poorest individual.
Policy B: A universal basic income grant. The government will give every individual a grant of $5,000.
Your task is to analyze the impact of each policy. First, calculate the Gini coefficient for the initial income distribution. Then, calculate the new Gini coefficient that would result from implementing Policy A and the new Gini coefficient that would result from implementing Policy B. Finally, recommend which policy is more effective at reducing income inequality, justifying your choice using your calculations. The Gini coefficient is calculated as half the ratio of the average income difference between all pairs of individuals to the population's average income.
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Introduction to Microeconomics Course
CORE Econ
Ch.5 The rules of the game: Who gets what and why - The Economy 2.0 Microeconomics @ CORE Econ
Evaluation in Bloom's Taxonomy
The Economy 2.0 Microeconomics @ CORE Econ
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