Other Policies to Reduce Inequality & Poverty (DP IB Economics)

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Other Policies

  • The poverty cycle diagram (below) was introduced in the previous subtopic and helps to explain the causes of poverty

  • Any policy that helps to break the poverty cycle at any point will help to improve the standards of living within a country 

  • Policies used to alleviate poverty include promoting economic growth, improving education, providing more generous state benefits, progressive taxation, and the establishment/increase of a national minimum wage
     
     

    5-2--poverty

Policies which help to improve any factor in the diagram will help to alleviate poverty
 

How Different Policies Alleviate Poverty


Policy


Explanation


Impact on Poverty Cycle

Investing in human capital e.g. education

  • Investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards)

Higher education/skill levels → higher human capital → increased productivity → higher output → higher income

More generous transfer payments

  • Transfer payments are usually given to the poorest and most vulnerable people in society

  • Transfer payments include unemployment and disability payments, pension payments, heating discounts, public transport subsidies etc.

More benefits → higher wages → better education/healthcare → better human capital → better productivity → higher wages

Establishment/increase of national minimum wage

  • Minimum wages are set above the free market rate

  • Firms are not allowed to pay anyone less than the legal rate

Higher wages → better education/healthcare → better human capital → better productivity → higher wages

Establishing a universal basic income

  • A universal basic income (UBI) is a guaranteed minimum income level - and when necessary,  paid by the government to each individual in society

Minimum income for all → better education/healthcare → better human capital → improved labour offer → decreasing unemployment

Targeted government spending on goods/services

  • This can be aimed at the greatest needs in society

  • E.g. Providing more schools, teachers or hospitals

Higher education/skill levels → higher human capital → increased productivity → higher output → higher income

Policies to reduce discrimination

  • Discrimination occurs in many different forms (age, ethnicity, gender, disability etc) and in each case results in social exclusion leading to inequalities of opportunity and income

  • Reducing discrimination reduces inequality

Less discrimination → better productivity → higher wages

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