Principles of Economics- Mankiw (5th) 426

Principles of Economics- Mankiw (5th) 426 - of income more...

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438 PART SIX THE ECONOMICS OF LABOR MARKETS In this chapter we discuss the distribution of income. As we shall see, this topic raises some fundamental questions about the role of economic policy. One of the Ten Principles of Economics in Chapter 1 is that governments can sometimes im- prove market outcomes. This possibility is particularly important when consider- ing the distribution of income. The invisible hand of the marketplace acts to allocate resources efficiently, but it does not necessarily ensure that resources are allocated fairly. As a result, many economists—though not all—believe that the government should redistribute income to achieve greater equality. In doing so, however, the government runs into another of the Ten Principles of Economics: Peo- ple face tradeoffs. When the government enacts policies to make the distribution
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Unformatted text preview: of income more equitable, it distorts incentives, alters behavior, and makes the al-location of resources less efficient. Our discussion of the distribution of income proceeds in three steps. First, we assess how much inequality there is in our society. Second, we consider some dif-ferent views about what role the government should play in altering the distribu-tion of income. Third, we discuss various public policies aimed at helping society’s poorest members. THE MEASUREMENT OF INEQUALITY We begin our study of the distribution of income by addressing four questions of measurement: ± How much inequality is there in our society? ± How many people live in poverty? “As far as I’m concerned, they can do what they want with the minimum wage, just as long as they keep their hands off the maximum wage.”...
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