Chapter 14 Efficiency, Equity and the Role of Government (II)

Economics Inquiry for HKDSE – Microeconomics 3 Chapter 14 Efficiency, Equity and the Role of Government (II)

Multiple Choice Questions |!|EM34001|!| Efficiency ____________ equality because ____________. A.

implies ... when income is equally distributed, efficiency is maximised

B.

implies ... when every individual has the same income, total expenditure and social well-being are maximised

C.

does not imply ... efficiency is about achieving the greatest possible output from scarce resources while equality is about whether income is distributed fairly among different individuals

D.

does not imply ... both efficiency and equality are subjective, and there is no way to tell whether they have been achieved

## C Efficiency is achieved when the economy gets the most from its scarce resources. Efficiency has nothing to do with how income is distributed. For example, when maximised income is solely enjoyed by one person in a society, efficiency is still achieved. ##

|!|EM34002|!| If Adam Smith's invisible hand is allowed to work, which of the following is/are very likely to be achieved? (1) equity (2) production efficiency (3) consumption efficiency (4) maximisation of total social surplus

A.

(1) and (4) only

B.

(1), (2) and (3) only

C.

(2), (3) and (4) only

D.

All of the above

© Aristo Educational Press Ltd.

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## C Invisible hand means the use of the market mechanism. This means that resource allocation is guided by market prices. Resource allocation by this means is the most efficient one, implying (2), (3) and (4) are correct. But efficiency does not imply anything about the issue of equity. ##

|!|EM34003|!| When is efficiency said to be achieved? (1) An economy gets the most from its scarce resources. (2) Consumer surplus is maximised. (3) Producer surplus is maximised. (4) The sum of consumer surplus and producer surplus is maximised. (5) Gains from market exchange are evenly distributed among all members of society.

A.

(1) and (4) only

B.

(4) and (5) only

C.

(1), (2) and (3) only

D.

(2), (3) and (4) only

## A Efficiency is achieved when an economy gets the most from its scarce resources, so (1) and (4) are correct. (2) or (3) alone is not sufficient to satisfy efficiency. Furthermore, efficiency does not imply whether the distribution of the gains from exchange is even or not. ##

|!|EM34004|!| In which of the following situations is efficiency achieved? A.

A cake is evenly divided into six pieces.

B.

With a given amount of ingredients, the largest possible cake is made.

C.

Mary gets a very large piece of cake.

D.

Sam gives out many pieces of cake.


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## B Efficiency is achieved when we get the most possible from our scarce resources. ##

|!|EM34005|!| Which of the following is NOT a way to measure the problem of income inequality? A.

efficiency

B.

income distribution

C.

the Lorenz curve

D.

the Gini coefficient

## A Efficiency has nothing to do with how income is distributed. Options B, C and D are common ways to measure income inequality. ##


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|!|EM34006|!| The following shows the Lorenz curve of Country A, B, C and D. Line A is also a diagonal of the rectangle.

Lorenz curve

Cumulative percentage of income

(A)

(B)

(C)

(D)

Cumulative percentage of households A: Lorenz curve of Country A B: Lorenz curve of Country B C: Lorenz curve of Country C D: Lorenz curve of Country D

With reference to the above diagram, the income distribution in Country A can be described by which of the following statements? A.

Every household has the same income.

B.

Only one household earns a positive income while all other households earn nothing.

C.

Income is unevenly distributed among different households.

D.

There is not enough information to determine.

## A Line A is the line of perfect income equality. It represents a perfectly equal income distribution in an economy where every household has the same income. ##


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|!|EM34007|!| The following shows the Lorenz curve of Country A.

Lorenz curve

60 Cumulative percentage of income

(A)

80 Cumulative percentage of households A: Lorenz curve of Country A

Which of the following interpretations of the Lorenz curve of Country A is CORRECT? A.

The bottom 80% of households earn 60% of the total income.

B.

The highest 80% of households earn 60% of the total income.

C.

The bottom 20% of households earn 60% of the total income.

D.

60% of the total income is equally distributed among the bottom 80% of households.

## A Every point on a Lorenz curve can be interpreted as “the lowest X% of households earn Y% of the total income”. Moreover, even though the bottom 80% of households earn 60% of the total income, we do not know whether or not the 60% of the total income is shared equally among the 80% of households. ##


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|!|EM34008|!|

Lorenz curve 100

80


60

40

20

0

20

40

60

80

100

Cumulative percentage of households

The above graph shows the Lorenz curve of Country A. Which of the following statements is CORRECT? A.

The income distribution of this country is perfectly equal.

B.

The top 20% of households have 60% of the total income.

C.

The bottom 20% of households have 40% of the total income.

D.

The top 40% of households have 20% of the total income.

## B From the graph, the top 20% households have 60% (=100% - 40%) of the total income. ##


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|!|EM34009|!|

Lorenz curve 100

80


60

40

Country B 20 Country A

0

20

40

60

80

100


The above graph shows the Lorenz curves of Country A and Country B. Suppose they have the same Gini coefficient. We can conclude that (1) there are more people in the higher-income group in Country A. (2) the lower-income group in Country B earns a higher percentage of the total income. (3) the lower-income group in Country B earns a higher income.

A.

(1) only

B.

(2) only

C.

(1) and (3) only

D.

(2) and (3) only

## B The lower-income group in Country B earns a higher percentage of the total income since the Lorenz curve of Country B lies above the Lorenz curve of Country A between 0% to 80% of the cumulative percentage of households. Moreover, the Lorenz curve shows the cumulative percentage of households rather than absolute number of households, so whether (1) is correct is uncertain. The Lorenz curve shows the cumulative percentage of income rather than absolute level of income, so whether (3) is correct or not is uncertain. ##


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|!|EM34010|!| The following shows the Lorenz curve of Economy X.

Lorenz curve 100

80


60

40

20

0

20

40

60

80

100


With reference to the above diagram, which of the following descriptions about the economy is CORRECT? A.

The economy has a Gini coefficient close to zero.

B.

The income distribution of the economy is very even.

C.

The top 20% of households earn about 90% of the total income in the economy.

D.

The Gini coefficient of the economy is greater than one.

## C From the diagram, we know that the bottom 80% of households earn only about 10% of the total income while the top 20% of households earn about 90% of the total income. The income distribution is highly uneven but still has not reached perfect income inequality, so the Gini coefficient is less than 1. ##


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|!|EM34011|!|

Lorenz curve 100

80


60

40

20

0

20

40

60

80

100


With reference to the above diagram, which of the following statements is CORRECT? (1) The top 20% of households earn 60% of the total income. (2) The bottom 20% of households earn less than 10% of the total income. (3) The top 20% of households owns 40% of the total wealth.

A.

(1) only

B.

(2) only

C.

(1) and (3) only

D.

(2) and (3) only

## B The top 20% of households earn 40% (=100% - 60%) rather than 60% of the total income. Moreover, the Lorenz curve shows the relationship between the cumulative percentage of income and the cumulative percentage of households. It does not show us the wealth distribution, so whether (3) is correct or not is uncertain. ##


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|!|EM34012|!| When the Gini coefficients of Country A and Country B are the same, we _________ conclude that the income distribution of the two countries is the same because ___________. A.

can ... the Gini coefficient is the most accurate measure of income inequality

B.

can ... the areas between the Lorenz curve and the line of perfect income equality are the same in the two countries

C.

cannot ... the shapes of Lorenz curves of the countries may not be the same

D.

cannot ... the Gini coefficient measures efficiency rather than income equality

## C Even though the areas between the lines of perfect income equality and the Lorenz curves are the same in two countries, it is still possible for the Lorenz curves to differ in shape. Therefore, income distribution may still be different. ##


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|!|EM34013|!| The following shows the Lorenz curves of Country A, B, C and D. Line A is also a diagonal of the rectangle.

Lorenz curve


(A)

(B)

(C)

(D)


With reference to the above diagram, the Gini coefficient of Country C should be _________________. A.

greater than zero and smaller than Country B's

B.

less than one, greater than zero and greater than Country B's

C.

greater than one and smaller than Country D's

D.

greater than zero and smaller than Country A's

## B The Gini coefficient is equal to the area between the line of perfect income equality and the Lorenz curve divided by the entire triangular area under the line of perfect income equality. Hence, the Gini coefficient of a country (including Country C) must be between zero and one. In addition, the area between Line A and Line C must be greater than the area between Line A and Line B, while they share the same triangular area below the line of perfect income equality. Thus, the Gini coefficient of Country C must be greater than that of Country B. ##


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|!|EM34014|!| The Gini coefficient based on household income before tax is usually A.

greater than that based on post-tax income because government taxes tend to narrow the income gap.

B.

greater than that based on post-tax income because income before tax is higher.

C.

equal to that based on post-tax income because income tax is proportional.

D.

equal to that based on post-tax income because the Gini coefficient has nothing to do with tax.

## A When the income tax is a proportional one, income distribution remains unchanged. However, the income tax may not be proportional, i.e. it may be progressive or regressive. Option C is incorrect. If the income tax is a regressive one, income inequality increases. Therefore, before tax, income is higher but the degree of income inequality is not necessarily higher. So option B is incorrect. ##

|!|EM34015|!| Which of the following is NOT a reason we should be careful in using the Gini coefficient to compare income inequality among different economies? A.

Different economies may use different types of income data.

B.

Population and family structures may be different among different economies.

C.

Some economies may use individual income rather than household income as income statistics.

D.

Living standards may be different among different economies.

## D Interpretation of the Gini coefficient should be taken with caution because different economies may use different types of information. For example, the Gini coefficient based on before tax and post tax income are different, so comparison of Gini coefficients among countries should take this into account. A change in living standard does not imply a change in Gini coefficient. For example, a 100% increase in income for every person leaves the Gini coefficient unchanged but increases welfare for all people. ##


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|!|EM34016|!| The following shows the Lorenz curves of Country A, B, C and D.

Lorenz curve


(A)

(B)

(C)

(D)


With reference to the above diagram, the income distribution in Country D can be described by which of the following statements? A.

All households except the richest one earn zero income.

B.

Every household has the same income.

C.

Income is evenly distributed among different households.

D.

There is not enough information to determine.

## A Line D is the line of perfect income inequality. It indicates that one household in the society earns all of the total income of the economy while all other households earn zero income. ##


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|!|EM34017|!| If Country A has an after-tax Gini coefficient of 0.2, we can conclude that the income distribution of the country is A.

perfectly equal.

B.

perfectly unequal.

C.

quite even.

D.

quite uneven.

## C The Gini coefficient lies between zero and one. The greater (smaller) the Gini coefficient, the higher (lower) the degree of income inequality. A value of zero indicates perfect equality while a value of one indicates perfect income inequality. Therefore, a Gini coefficient of 0.2 means a quite even income distribution. ##

|!|EM34018|!| Suppose Hong Kong and Singapore have the same Gini coefficient. We can conclude that A.

the degree of income inequality is similar in both places.

B.

people in these places earn the same amount of income.

C.

the income distributions of these places are the same.

D.

the two places have the same Lorenz curve.

## A The Gini coefficient is a measure of the degree of income inequality. Since the two places have the same Gini coefficient, they have similar levels of income equality. Two areas with different income distributions can still have the same Gini coefficient. Therefore, options C and D are incorrect. ##


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|!|EM34019|!| The following table shows the Gini coefficient of Country A and Country B between 2004 and 2008.

Country/Year Country A Country B

2004 0.54 0.75

2005 0.52 0.65

2006 0.43 0.55

2007 0.39 0.45

2008 0.38 0.40

Which of the following statements is CORRECT? A.

The income of Country B is more evenly distributed.

B.

The Lorenz curve of Country B lies between the Lorenz curve of Country A and the line of perfect income equality.

C.

The Lorenz curve of Country A is closer to the line of perfect income equality.

D.

The Lorenz curve of Country A is above the line of perfect income equality.

## C The smaller the value of the Gini coefficient, the more equal the income distribution and the closer is the Lorenz curve to the line of perfect income equality. ##

|!|EM34020|!| The Gini coefficient of Country A is higher than that of Country B. Which of the following is NOT a possible reason? A.

Country A has a larger proportion of population with tertiary education.

B.

Country A's capital distribution is more uneven.

C.

The degree of progressivity of the tax system in Country A is higher.

D.

More industries in Country A are monopolised by large firms.

## C If the tax system in Country A is more progressive, income distribution will be more even. The Gini coefficient should be smaller. Tertiary education, ownership of capital and monopolisation of industries all tend to increase income. Therefore, options A, B and D may account for Country A’s higher Gini coefficient. ##


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|!|EM34021|!| Suppose more and more people settle down in Economy X for retirement. Economy X’s Gini coefficient will ___________. A.

increases

B.

decreases

C.

remains unchanged

D.

There is insufficient information to determine.

## A The retired do not have earned income. An increase in the proportion of people with zero earned income makes income distribution more uneven. Therefore, the Gini coefficient increases. ##

|!|EM34022|!| Which of the following statements about a sales tax is CORRECT? A.

A sales tax is a proportional tax because everyone pays the same amount of tax whether he is rich or not.

B.

A sales tax is an indirect tax because the burden can be shifted to a third party.

C.

A sales tax is a regressive tax because the tax rates on luxuries are higher.

D.

A sales tax is a direct tax because the tax is collected directly from sellers.

## B An indirect tax is a tax where the tax burden can be shifted from the party being taxed to other parties. In the case of a sales tax, a seller can shift the tax burden to its customers by raising the selling price. ##


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|!|EM34023|!| Which of the following are possible reasons for income inequality? (1) different academic backgrounds (2) different appearance (3) most taxes being progressive (4) availability of unemployment benefits

A.

(1) and (2) only

B.

(1) and (4) only

C.

(2) and (3) only

D.

(1), (2) and (4) only

## A Both (1) and (2) contribute to differences in income. For instance, a candidate with higher academic qualifications may be regarded as more skillful and knowledgeable while someone with more attractive appearance may have more career choices (e.g. in the entertainment business). If most taxes are progressive, income distribution will be more even and (3) is not a reason. Furthermore, unemployment benefits narrow the income difference between the unemployed and the employed (especially for the low-income group), so they will cause a more even distribution of income and (4) is not a reason. ##

|!|EM34024|!| Which of the following will not affect income distribution? A.

progressive tax

B.

proportional tax

C.

regressive tax

D.

None of the above.


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## B A proportional tax is defined as a tax that takes up the same percentage of income from all income groups. Therefore, the income gap between the high and low-income groups remains the same and the income distribution remains unchanged. ##

|!|EM34025|!| The effect of which of the following items on income distribution is not shown in the Gini coefficient? A.

direct tax

B.

progressive tax

C.

transfer payments in kind

D.

transfer payments in cash

## C The Gini coefficient reflects income inequality in terms of money income only but transfer payments in kind do not affect recipients' money income. ##

|!|EM34026|!| Which of the following does not lead to compensating differentials? A.

more dangerous environment

B.

job requirement of a university degree

C.

overnight work

D.

exceptionally dry conditions

## B Compensating differentials are differences in the non-monetary aspects of a job that will lead to wage differences. They are not related to the productivity of workers. So option B is not about a compensating differential. ##


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|!|EM34027|!| Which of the following decrease(s) the value of the Gini coefficient? (1) progressive direct taxes (2) transfer payments (3) unemployment benefits

A.

(1) only

B.

(2) only

C.

(1) and (2) only

D.

(1), (2) and (3)

## D The Gini coefficient is a measure of degree of income inequality. The three measures mentioned above narrow the income difference between the higher-income group and the lower-income group. Hence, they lower the income inequality and the value of the Gini coefficient. ##

|!|EM34028|!| The table below shows the Gini coefficient of an economy calculated using different income data. Which of the following statements is CORRECT?

Income data used Monthly income from main employment Post-tax monthly household income

Gini coefficient 0.88 0.25

A.

Most taxes are progressive taxes.

B.

Most taxes are regressive taxes.

C.

People in the higher-income group have greater incentive to work after tax.

D.

Income distribution is more uneven after tax.


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## A The Gini coefficient is a measure of the degree of income inequality. A lower post-tax Gini coefficient means the degree of inequality is lower after tax. Hence, most taxes should be progressive taxes, where the higher-income group pays a larger percentage of income than the lower income groups. ##

|!|EM34029|!| The after-tax Gini coefficient of Country X is 0.12. We can conclude that A.

most taxes are regressive.

B.

the proportion of low-income households among all households is low.

C.

the high income group earn a large amount of interest.

D.

None of the above.

## D Without the information of before-tax Gini coefficient, we do not know how the inclusion of tax affects income inequality. Hence, we cannot judge whether the tax system is a progressive one. ##

|!|EM34030|!| Which of the following factors would NOT affect the household income in the calculation of the Gini coefficient? A.

taxes

B.

transfer payments

C.

transportation costs

D.

interest rates

## C Transportation cost is only an expense of households. It would not affect household income. ##


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|!|EM34031|!| Mary gets a higher salary than Sam as a teacher. Which of the following can explain this? (1) Mary may have completed more education than Sam. (2) There may be sex discrimination against Sam. (3) Sam may receive more non-monetary rewards than Mary from teaching.

A.

(1) only

B.

(1) and (2) only

C.

(2) and (3) only

D.

(1), (2) and (3)

## D If Mary receives more education than Sam, she will have a higher productivity. Therefore, she deserves a higher pay. Moreover, if there is sex discrimination against male workers, Sam will get a lower pay. Finally, if Sam receives more non-monetary rewards than Mary, he may be willing to accept less pay. ##

|!|EM34032|!| Which of the following measures is usually not used to improve income equality? A.

sales tax

B.

subsidised housing

C.

Comprehensive Social Security Assistance

D.

public hospital services

## A A sales tax is usually a regressive tax. It tends to worsen income inequality since the same amount of tax takes up a smaller percentage of income as income increases. ##


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|!|EM34033|!| Which of the following statements is INCORRECT? A.

Direct taxes can always improve income distribution.

B.

Progressive taxes can improve income distribution.

C.

The structure of salaries tax in Hong Kong can improve income distribution.

D.

Transfer payments can improve income distribution.

## A Not all the direct taxes can improve income distribution. Only progressive taxes can improve income distribution. For most people in Hong Kong, the salaries tax is a progressive tax. ##

|!|EM34034|!|

John

Mary

Form 6

Master Degree

50

25

Marital status

Married

Single

Nationality

British

American

Education Age

If John's salary is higher than Mary's, which of the following is CORRECT? A.

Mary has a lower productivity.

B.

Mary is discriminated against by her employer.

C.

Mary is paid a lower wage because of her inadequate working experience.

D.

None of the above is correct.


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## D Since we do no have any information about the productivities of these two workers, we are not able to judge whether there is discrimination against Mary or not. Moreover, the higher age of John is not sufficient to indicate he has more relevant working experience. ##

|!|EM34035|!| Suppose Country Y’s government imposes a head tax on its people, i.e. everyone pays the same amount of tax to the government. Which of the following is an effect of the tax? A.

Income distribution becomes more even.

B.

The income difference between the higher and lower-income groups is enlarged.

C.

The Lorenz curve moves closer to the line of perfect income equality.

D.

None of the above is correct.

## D A head tax reduces everyone’s after-tax income by the same amount. Therefore, the income difference between the higher and lower-income groups remains unchanged. However, since the same amount of tax takes up a greater proportion of income from the lower-income group than from the higher-income group, the income distribution after tax becomes more uneven and the Lorenz curve moves further away from the line of perfect income equality. ##

|!|EM34036|!| If the government increases unemployment benefits, how would this affect the economy? A.

More people are willing to seek jobs.

B.

The high-income group has greater incentive to work.

C.

It increases the unemployment rate among the low-income group.

D.

Efficiency increases.


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## C An increase in unemployment benefits tends to weaken the incentive to work, especially for lowincome workers. It narrows the income difference between working and not working. The cost of being unemployed is reduced. Hence, more low-income workers prefer to be unemployed. ##

|!|EM34037|!| In economics, which of the following about equity is correct? A.

Achieving equity is the same as equalising outcome.

B.

Achieving equity is the same as equalising opportunities.

C.

Equity is a by-product of achieving efficiency.

D.

Different people have different ethical principles of equity.

## D Equity is about fairness or justice. It depends on one’s ethical principles. Equalising income and equalising wealth are just two common examples of principles of equity. ##

|!|EM34038|!| Which of the following is the most likely effect of a minimum wage law? A.

an increase in unemployed population

B.

a reduction in income inequality

C.

an increase in GDP

D.

a reduction in the number of people getting the Comprehensive Social Security Assistance

## A When the government imposes a minimum wage which is above the equilibrium wage, there is an excess supply of labour. ##


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|!|EM34039|!| Equalising outcome is A.

more difficult to measure than equalising opportunities.

B.

to reduce the differences in income among households in an economy.

C.

to equalise wages.

D.

to increase the efficiency of an economy.

## B Equalising outcome is an idea of fairness which seeks to reduce or eliminate differences in income and/or wealth among individuals or households in an economy. ##

|!|EM34040|!| If the government imposes a salaries tax with a 100% tax rate, and then redistributes the tax revenue collected equally among the people, which of the following is/are CORRECT? (1) All people get the same income. (2) Efficiency is achieved. (3) No one is willing to work.

A.

(1) only

B.

(3) only

C.

(1) and (2) only

D.

(1) and (3) only

## D Under this policy, you can get the same amount of income whether you work or not. By choosing not to work, a person can enjoy more leisure. ##


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|!|EM34041|!| Suppose the government increases the cigarette tax from $5 to $10 per unit. Which of the following statements is/are CORRECT? (1) The low-income group pays a larger percentage of income as tax than the high-income group. (2) The tax is disliked by the high-income group most. (3) Income inequality is reduced.

A.

(1) only

B.

(2) only

C.

(1) and (3) only

D.

(2) and (3) only

## A A cigarette tax is a regressive tax. After the increase in tax rate for the same quantity of cigarettes consumed, the low-income group still pays a larger percentage of income as tax than the high-income group. Therefore, it is disliked by the low-income group most. Furthermore, income inequality is increased as the tax is a regressive tax. ##

|!|EM34042|!| Suppose the government imposes an effective minimum wage. Which of the following statements is CORRECT? A.

The unemployment rate is reduced.

B.

Efficiency is achieved.

C.

Income inequality is reduced.

D.

Income of some poor people increases.

## D An effective minimum wage law raises the income of some poor people. However, it raises the unemployment rate. Hence, income inequality can be reduced only if unemployment benefits are given. ##


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|!|EM34043|!| Suppose the government adopts policies to equalise opportunities. Which of the following is INCORRECT? A.

Income of each individual depends on ability and effort, not personal background.

B.

Discrimination against different backgrounds is eliminated.

C.

Individuals' efforts are maximised because their pay is determined by their efforts.

D.

Everyone in the economy gets the same amount of income.

## D Equalising income is not same as equalising opportunities. Differences in efforts put into work and abilities lead to differences in income. Therefore, even if the government has equalised opportunities, there are still differences in income. ##

|!|EM34044|!| Which of the following can be used by the government to achieve the goal of equalising opportunities? (1) Sex Discrimination Ordinance (2) Equal Opportunities Commission (3) Race Discrimination Ordinance (4) public medical service (5) public housing

A.

(1) and (2) only

B.

(4) and (5) only

C.

(1), (2) and (3) only

D.

All of the above.

## B The aim of (1), (2) and (3) is to ensure that everyone has equal opportunity to use his or her talents to earn income. The public services of (4) and (5) are used to reduce income inequality because these government-subsidised public services are often used by the lower-income group. ##


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|!|EM34045|!| Assuming that employers adopt the principle of equalising opportunities, which of the following is/are not considered in their employment decisions? (1) candidates' nationality (2) effort and time that candidates are willing to devote to work (3) candidates' social status (4) candidates' family backgrounds

A.

(1) and (3) only

B.

(2) and (4) only

C.

(1), (3) and (4) only

D.

All of the above.

## B The principle of equalising opportunities states that a person's income should be determined by his/ her effort instead of his/ her backgrounds. (1), (3), (4) are usually beyond an individual's control, so they are not usually factors to be considered. ##

|!|EM34046|!| Which of the following scenarios ensure(s) equalised opportunities without the need of government intervention? (1) The market is competitive. (2) Firms aim at profit maximisation. (3) There is a surplus in labour market. (4) There is a shortage in labour market.

A.

(1) only

B.

(2) only

C.

(1) and (2) only

D.

(3) and (4) only


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## C When the market is competitive, employers will try their best to employ the most productive workers. Otherwise, they will not be able to earn the highest profit and survive in the long run. ##

|!|EM34047|!| Which of the following descriptions about equalising opportunities is CORRECT? A.

People should be treated differently in similar situations.

B.

The government need not carry out income redistribution if the principle of equalising opportunities has been fulfilled.

C.

Discrimination is one way to equalise opportunities.

D.

Two people with different academic backgrounds should be paid the same.

## B Under this principle, as long as there are equal opportunities to earn income, the resulting income distribution is fair, even when the distribution of income is unequal. Hence, the government need not redistribute income to achieve income equality. ##

|!|EM34048|!| Which of the following helps achieve the principle of equalising opportunities? A.

increasing the subsidies for on-the-job training programmes

B.

passing a law against racial discrimination

C.

increasing the tax allowances for the low-income group

D.

imposing a minimum wage law

## B Equalising opportunities is an idea of fairness that ensures different people in similar situations be treated similarly. Without racial discrimination, people of different races with similar abilities will be paid similarly. ##


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|!|EM34049|!| Which of the following is/are not policies aimed at equalising opportunities? (1) retraining programmes for middle-aged workers (2) antitrust laws (3) introduction of a minimum wage (4) loans for poor university students

A.

(1) only

B.

(3) only

C.

(2) and (3) only

D.

None of the above.

## B A minimum wage increases income for low-income workers and is aimed at equalising outcome rather than opportunities. Retraining programmes for the middle-age workers make the middle-age workers more competitive in the labour market. Antitrust laws enable small firms to compete with large firms. Loans for poor university students ensure these students are not deprived of university education because of their financial condition. All these are aimed at equalising opportunities. ##

|!|EM34050|!| Which of the following policies for reducing income inequality may bring adverse effects? (1) a tax on the returns of savings (2) profits tax (3) unemployment benefits

A.

(1) only

B.

(1) and (2) only

C.

(2) and (3) only

D.

(1), (2) and (3)


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## D Both the tax on the returns of savings and profits tax will decrease people’s incentive to save and invest. Furthermore, if the unemployment benefits are too high, the low-income group may quit the labour market and choose to be unemployed. ##

|!|EM34051|!| Which of the following discourages investment? A.

High profits tax because it reduces the net return on investment.

B.

High salaries tax because it increases labour cost.

C.

High depreciation allowances because it decreases taxable profits.

D.

High unemployment benefits because they reduce the income gap.

## A Return on investment provides firms with the incentive to invest. When the profits tax is high, the net return on investment decreases, and some projects may even become unprofitable. Therefore, a high profits tax discourages investment. High depreciation allowances reduce taxable profits and hence encourage investment. ##

|!|EM34052|!| Which of the following is likely to be a reason that “equity” and “efficiency” may not be achieved at the same time in the case of taxation? A.

high administrative and monitoring costs of taxation

B.

work disincentive for the high-income group

C.

work disincentive for the low-income group

D.

All of the above are correct.


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## D When the government narrows the income gap between the high- income group and the low-income group through taxation, high administration and monitoring costs are involved. When an income tax is imposed, the net return from work decreases and the incentive for both high and low-income groups to earn higher income is lower. ##

|!|EM34053|!| Suppose income redistribution raises total consumption, production and resource utilisation. What will happen to efficiency and income inequality? A.

Efficiency improves but income inequality remains unchanged.

B.

Both income inequality and efficiency remain unchanged.

C.

Both efficiency and income inequality improve.

D.

Both efficiency and income inequality worsen.

## C A redistribution of income from the high-income group to the low-income group improves income inequality. When total consumption, production and resource utilisation increase, efficiency improves. Therefore, both efficiency and income inequality improve. #

|!|EM34054|!| Which of the followings helps improve both income inequality and efficiency? A.

subsidies in kind

B.

subsidies in cash

C.

job creation for the lower income group

D.

job creation for professionals


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## C Job creation for the lower-income group does not affect others' incentive to work. At the same time, job creation for the lower-income group also raises the lower-income group's income and hence improves income inequality. ##


14-33


Short Questions |!|ES34001|!|

1996

2006

Monthly domestic household income (HK$)

%

%

< 8,000

16.5

21.3

8,000 - 39,999

68.6

61.6

> 40,000

15

17

Total

100

100

(Source: Census and Statistics Department, HKSAR Government)

What implications about the trend of income equality during the period 1996-2006 can we draw from the above table? Explain your answer.

(4 marks)

## The proportion of households with monthly domestic household income less than HK$8,000 increased. (1 mark) The proportion of households with monthly domestic household income between HK$8,000 and HK$39,999 decreased.

(1 mark)

The proportion of households with monthly domestic household income greater than HK$40,000 increased.

(1 mark)

Therefore, income distribution became more uneven during the period 1996-2006.

(1 mark)

##


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|!|ES34002|!| Lorenz curve of Country A

Lorenz curve of Country B

100

100

80

80

Cumulative 60 percentage of income 40


20

20

0

20

40

60

80

100

0


20

40

60

80

100


With reference to the Lorenz curves of Country A and Country B, (a)

compare the income distribution for the top 20% of households and the Gini coefficient of the two countries.

(4 marks)

(b) can we conclude that Country B's bottom 80% of households enjoy a living standard higher than that of Country A?

(5 marks)

## (a)

The top 20% of households in Country A earn about 80% of the total income of the economy while the top 20% of households in Country B earn about 55% of the total income of the economy.

(2 marks)

Since the Lorenz curve of Country A is further away from the line of perfect income equality, the Gini coefficient of Country A is higher than that of Country B. (b) No.

(2 marks) (1 mark)

From the Lorenz curves of the two countries, we can conclude only that the bottom 80% of households of Country B earn a higher proportion of total income of the economy.

(1 mark)

Since the exact amounts of the total incomes of both countries are not known, we do not know whether Country B's bottom 80% households earn a higher income than Country A’s bottom 80% of households.

(1 mark)

Moreover, we have to take into account factors such as the prices of goods, per capita income and pollution issues.

(2 marks)

##


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|!|ES34003|!| (a)

Define the Lorenz curve and the Gini coefficient.

(4 marks)

(b) Use the Lorenz curve to illustrate the condition of perfect income equality. Explain your answer. (4 marks)

## (a)

The Lorenz curve expresses the relationship between the cumulative percentage of households and the cumulative percentage of income.

(2 marks)

The Gini coefficient is equal to the area between the line of perfect income equality and the Lorenz curve divided by the entire triangular area under the line of perfect income equality. (2 marks)

Lorenz curve

(b) 100

80


20

0

20

40

60

80

100

(2 marks)


In an economy with perfect income equality, every household earns the same amount of income. As indicated in the diagram above, the Lorenz curve is a diagonal of the diagram. Since the income is evenly distributed, the bottom 60% of the households must earn 60% of the total income and so on.

(2 marks)

##

|!|ES34004|!| (a)

What is the Lorenz curve?

(2 marks)

(b) Explain why the Lorenz curve constructed using post-tax and post-transfer-payment monthly household income usually lies above the Lorenz curve constructed using monthly income from main employment.


(3 marks)

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## (a)


(2 marks)

(b) Since taxes and transfer payments reduce the income gap between the higher income group and the lower income group, the income distribution of the economy becomes more even.

(2 marks)

Therefore, the Lorenz curve constructed using post-tax and post-transfer-payment monthly income is closer to the line of perfect income equality.

(1 mark)

|!|ES34005|!| (a)

What is a regressive tax?

(b) Does a per-unit sales tax help achieve equity in an economy? Explain.

(2 marks) (3 marks)

## (a)

A regressive tax is a tax that takes up a smaller percentage of income as income increases. (2 marks)

(b) No.

(1 mark)

A per-unit sales tax is a regressive tax. The same amount of tax takes up a larger proportion of income from the low-income group than the high-income group. Hence, income inequality tends to increase.

(2 marks)

##

|!|ES34006|!| A country's government imposes a per-unit tax on business class air tickets. (a)

Is it a direct tax or an indirect tax? Explain.

(b) Does the tax improve income distribution? Explain.

(2 marks) (3 marks)

## (a)

An indirect tax.

(1 mark)

The tax burden can be shifted from airline companies to consumers.

(1 mark)

(b) Yes.

(1 mark)

Since business class air tickets are mostly consumed by the high-income group, the tax tends to affect the high-income group. Therefore, the income gap can be reduced and income distribution becomes more even.

(2 marks)

##


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|!|ES34007|!| Give TWO reasons that workers who put the same amount of effort into work may still be paid differently.

(4 marks)

## Reasons include: - Difference in natural abilities: People’s intelligence, appearance and creatively can be very different. - Difference in education and training: From the employer’s point of view, well-educated and welltrained are worth higher pay than workers who possess less skill and/or knowledge. - any reasonable answer(s) (Mark the FIRST TWO points only, 2 marks each) ##

|!|ES34008|!| “...Kowloon Motor Bus and Citybus have agreed to pay rises proposed by union representatives. However, since some New World First bus drivers want to increase the minimum pay rise to 310 dollars, they are continuing to negotiate with the company...” Do you think trade union protection contributes to wage differences? If yes, explain why trade unions can be successful in negotiating higher wages.

(3 marks)

## Yes.

(1 mark)

Trade unions usually have a much larger bargaining power in negotiations with an employer than individual workers do. This is because employers do not want to take the risk of large scale industrial action which would adversely affect the company's goodwill and income. So trade unions are more successful at obtaining higher wages for their members.

(2 marks)

##

|!|ES34009|!| (a)

(i)

Suggest ONE example of a transfer payment in kind in Hong Kong.

(1 mark)

(ii) Suggest ONE example of a transfer payment in cash in Hong Kong.

(1 mark)

(b) Under which type of transfer payment will the Gini coefficient overestimate income inequality? Explain.


(3 marks)

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## (a)

(i)

- public medical service - subsidised housing - any reasonable answer(s) (Mark the FIRST point only, 1 mark)

(ii)

- Comprehensive Social Security Assistance - any reasonable answer(s) (Mark the FIRST point only, 1 mark)

(b) Transfer payments in kind If the transfer payments are in kind, the money income of recipients will be the same.

(1 mark) (1 mark)

Since the Gini coefficient reflects the inequality in monetary income only, the problem of income inequality will be overstated when there are transfer payments in kind.

(1 mark)

##

|!|ES34010|!| (a)

Give and explain ONE example of regressive tax.

(b) Does a regressive tax help alleviate the problem of income inequality? Explain.

(3 marks) (3 marks)

## (a)

A sales tax is an example of regressive tax.

(1 mark)

Regressive tax is a tax that takes up a smaller percentage of income as income increases. (1 mark) Since the same amount of tax takes up a higher proportion of income from the low-income group than the high-income group, a sales tax is a regressive tax. (b) No.

(1 mark) (1 mark)

The low-income group pays a larger percentage of their income as tax than the high-income group. Thus, a regressive tax widens income inequality.

(2 marks)

##

|!|ES34011|!| (a)

Draw a supply-demand diagram to illustrate the effect of a minimum wage on employment. Explain your answer.

(5 marks)

(b) Suppose there are no unemployment benefits in Economy A. Will the imposition of a minimum wage reduce the income gap? Explain.


(4 marks)

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## Wage rate ($)

(a)

S Unemployment W2

W1

D 0

L2

L1

Number of workers

(3 marks) Suppose the market is in equilibrium initially with the wage rate W1 and employment level L1. With an effective minimum wage of W2, the employment level decreases from L1 to L2 .The quantity supplied is greater than the quantity demanded, so there is unemployment of workers. (2 marks) (b) No.

(1 mark)

As indicated in the diagram above, a minimum wage will lead to unemployment of workers. (1 mark) If there are no unemployment benefits in Economy A, the unemployed population will receive no income.

(1 mark)

As the percentage of households receiving zero income increases, the problem of income inequality will worsen.

(1 mark)

##

|!|ES34012|!| (a)

Name TWO benefits provided by the government which can reduce income inequality. (2 marks)

(b) Suppose the government lengthens the period of free education from 9 years to 12 years. Can this reduce income inequality? Explain your answer.


(2 marks)

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## (a)

- unemployment benefits - public housing - public medical services - any reasonable answer(s) (Mark the FIRST TWO points only, 1 mark each)

(b) No.

(1 mark)

Free education can be enjoyed by people of all income levels.

(1 mark)

OR Yes.

(1 mark)

Free education is mostly enjoyed by the low-income group.

(1 mark)

##

|!|ES34013|!| (a)

What is the principle of equalising opportunities?

(2 marks)

(b) Explain ONE government education policy which can help achieve this principle.

(2 marks)

## (a)

It is an idea of fairness that ensures different people in similar situations are treated similarly. (2 marks)

(b) - The government may provide more subsidies to students from low-income families so that they would not be deprived of a university education. - any reasonable answer(s) (Mark the FIRST point only, 2 marks) ##

|!|ES34014|!| Anita said, ‘In a highly competitive market, no government policies are needed to deal with employment discrimination.’ Do you agree? Explain your answer.


(4 marks)

14-41


## Yes.

(1 mark)

In a highly competitive market, firms employ workers that have the highest productivity, regardless of their personal characteristics.

(1 mark)

If firms discriminate against people with certain characteristics, their productivity will decrease and their costs will increase.

(1 mark)

They will be eliminated in the market through competition.

(1 mark)

##

|!|ES34015|!| “A minimum wage will help achieve equity in an economy.” Discuss the circumstances under which the statement is correct.

(3 marks)

## A minimum wage can help the poor by raising their income. However, it also raises the unemployment rate.

(2 marks)

Hence, a minimum wage can reduce income inequality only if unemployment benefits are given. (1 mark) ##

|!|ES34016|!| More than 800 employees of the Immigration Department appeared in a forum at the Immigration Tower yesterday. They protested that they were paid $400 to $3,000 less than the employees in other disciplined services. Currently, the starting salary for an immigration assistant is $14,275, while officers in Correctional Services and Customs and Excise Department have a starting salary of $14,685. Police officers are paid even more. (August 3, 2009) (a)

Which principle of equity did the Immigration Department employees consider to be violated by the Hong Kong Government?

(2 marks)

(b) Do you think the government actually violates the principle under the present pay scale? Explain your answer.


(3 marks)

14-42


## (a)

equalising opportunities

(b) Yes.

(2 marks) (1 mark)

This is because the employees of the Immigration Department receive a lower income for similar jobs.

(2 marks)

OR No.

(1 mark)

This is because the nature of jobs is different / the jobs of Immigration Department involve a lower risk compared with other disciplined services.

(2 marks)

##

|!|ES34017|!| (a)

State and explain the two principles of equity.

(4 marks)

(b) Is there any conflict between equity and efficiency? If yes, give ONE example where there is such a conflict.

(3 marks)

## (a)

“Equalising outcome” is an idea of fairness which seeks to reduce or eliminate differences in income and/or wealth among individuals or households in an economy.

(2 marks)

“Equalising opportunities” is an idea of fairness that ensures different people in similar situations be treated similarly. (b) Sometimes, there may be a trade-off between equity and efficiency.

(2 marks) (1 mark)

For example, the government may try to equalise outcome by collecting high taxes from the highincome group and redistributing them to the low-income group. Both the high-income and lowincome groups will have less incentive to work. In this case, “equity” is achieved at the cost of reduced efficiency. (Accept any other reasonable answers)

(2 marks)

##


14-43


Long Questions |!|EL34001|!| (a)

What is the Lorenz curve?

(2 marks)

(b) “In reality, the Lorenz curve is increasing and convex.” Do you agree? Explain your answer. (5 marks) (c)

“If the Gini coefficients of Country X and Country Y are 0.3 and 0.5 respectively, people in Country X must have a higher living standard than people in Country Y.” Explain whether this statement is correct.

(4 marks)

## (a)


(b) Agree. In reality, income is distributed unevenly.

(2 marks) (1 mark) (1 mark)

Since households in an economy are ranked according to their incomes in ascending order, the total income of households of a given quintile should be lower than that of the next quintile. The cumulative percentage of income should increase at an increasing rate in reality. Hence, the Lorenz curve is usually increasing and convex. (c)

(3 marks)

Incorrect.

(1 mark)

The Gini coefficient is only a measure of the degree of income inequality.

(1 mark)

Even if the income distribution in Country X is more even, we cannot conclude that people in Country X enjoys a higher living standard.

(1 mark)

We should also consider the absolute value of income, the price level, pollution issues, etc. (1 mark) ##


14-44


|!|EL34002|!| In Country A, half of the population have an income of I and the other people have an income of 2I. (a)

Draw the Lorenz curve for Country A.

(5 marks)

(b) Suppose Country A’s government carries out an income redistribution programme where a person with an income of 2I has to pay a tax of 0.5I, which is then redistributed to another person with an income of I. (i)

Is income distribution more equal or unequal after the income redistribution programme? Explain your answer.

(2 marks)

(ii) Draw the new Lorenz curve. What does the new Lorenz curve tell us about the new income distribution? Is the answer consistent with your answer in (b)(i)? (c)

(7 marks)

Suppose the operation of income redistribution takes up scarce resources. For example, tax collection and subsidy distribution involve administration costs. Assume 0.25I is deducted from each tax payment before it is redistributed. (i)

Draw the new Lorenz curve. Can the income redistribution programme achieve the same income distribution in (b)?

(6 marks)

(ii) A social worker says, “The government can achieve perfect income equality by redistributing income among its people.” In light of what your answers in previous parts, evaluate his statement.


(8 marks)

14-45


## (a) Suppose the population of Country A = N When the cumulative percentage of households = 0%, the cumulative percentage of income = 0%. When the cumulative percentage of households = 50%, the cumulative percentage of income = (0.5  N  I) / (0.5  N  I + 0.5  N  2I) = I / 3I = 0.33 = 33%. When the cumulative percentage of households = 100%, the cumulative percentage of income = 100%.


Lorenz curve

33.3

0

50 Cumulative percentage of households


(5 marks)

14-46


(b) (i)

After the income redistribution programme: Income of a person receiving the subsidy = I + 0.5I = 1.5I.

(0.5 mark)

Income of a person paying the tax = 2I - 0.5I = 1.5I.

(0.5 mark)

Therefore, the income distribution becomes more equal.

(1 mark)

(ii) When the cumulative percentage of households = 0%, the cumulative percentage of income = 0%. When the cumulative percentage of households = 50%, the cumulative percentage of income = (0.5  N  1.5I) / (0.5  N  1.5I + 0.5  N  1.5I) = 1.5I / 3I = 0.5 = 50%. When the cumulative percentage of households = 100%, the cumulative percentage of income = 100%.

New Lorenz curve


50

Old Lorenz curve 33.3

0


(5 marks)

Since the new Lorenz curve is above the old Lorenz curve, income distribution is more equal.

(1 mark)

OR Since the new Lorenz curve coincides with the perfect income equality line, income distribution achieves perfect equality.

(1 mark)

This is consistent with the answer in (b)(i).

(1 mark)


14-47


(c)

(i)

When the cumulative percentage of households = 0%, the cumulative percentage of income = 0%. When the cumulative percentage of households = 50%, the cumulative percentage of income = (0.5  N  1.25I) / (0.5  N  1.25I + 0.5  N  1.5I) = 1.25I / 2.75I = 0.455 = 45.5%. When the cumulative percentage of households = 100%, the cumulative percentage of income = 100%.

New Lorenz curve after income redistribution without administration costs


New Lorenz curve after income redistribution with administration costs 50 45.5 Old Lorenz curve 33.3

0


(5 marks)

The income redistribution programme with administration costs cannot achieve perfect income equality for Country A.

(1 mark)

(ii) As shown in the answer to part (b), if the income redistribution programme does not use any scarce resources, the government can achieve perfect income equality by implementing it. (2 marks) As shown in the answer to part (c), if the income redistribution programme consumes some of the income transfer in the process, the government cannot achieve perfect income equality by implementing it.

(2 marks)

In reality, the income redistribution programme must consume resources. If the administration cost arises from the income transfer, it is impossible to achieve perfect income equality.

(2 marks)

Therefore, whether the statement is correct in reality depends on how the government pays for the administration cost.

(2 marks)

##


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|!|EL34003|!| Suppose the labour market is perfectly competitive and every worker has the same labour supply curve. (a)

(i)

State the law of supply.

(2 marks)

(ii) Suppose John’s wage rate is higher than Mary’s. Do you expect John’s working hours to be longer than Mary’s?

(2 marks)

(b) Suppose Mary chooses to work x hours at the current wage rate. With the aid of a well-labelled diagram, compare their wage income difference when (i)

both work x hours; and

(4 marks)

(ii) both work according to their labour supply curves. (c)

(4 marks)

An economist says, “Differences in abilities create income inequality. People’s labour supply decisions further increase the resulting income inequality.” In light of your answers in (a) and (b), evaluate his statement.

(6 marks)

## (a)

(i)

The law of supply states that an increase (a decrease) in the price of a good will result in an increase (a decrease) in quantity supplied, ceteris paribus.

(2 marks)

(ii) By the law of supply, John's quantity supplied is greater than Mary's, i.e. he works longer hours than Mary does. (b) (i)

(2 marks)

Let the wage rates for Mary and John be WM and WJ. When both work x hours, Mary’s wage income is WMx while John’s wage income is WJx. Therefore, their wage income difference is (WJ -WM)x.

(2 marks)

Wage rate ($)

S

Income difference if both work x hours WJ

WM

0

Quantity of labour

(2 marks)

x


14-49


(ii) When both work according to their supply curves, Mary’s wage income is W Mx while John’s wage income is WJLJ. Therefore, their wage income difference is WJLJ - WMx.

(2 marks)

Wage rate ($)

S

Income difference if both work x hours WJ

Income difference if both work according to their supply curves

WM

0

(c)

LM = x

LJ

Quantity of labour

(2 marks)

Since productivities of workers affect the wage rate, differences in abilities imply differences in wage rates.

(1 mark)

The more productive a worker is, the higher the wage rate.

(1 mark)

According to the law of supply, the more productive a worker is, the higher his wage rate, and the longer his working hours.

(1 mark)

In the above case, the wage income difference due to their differences in productivity is equal to (WJ -WM)x.

(1 mark)

In the above case, the wage income difference due to differences in both productivities and working hours is equal to WJLJ - WMx, which is much higher.

(1 mark)

Therefore, if workers’ behaviour is consistent with the law of supply, labour supply decisions will enlarge wage income differences due to differences in productivity.

(1 mark)

##


14-50


|!|EL34004|!| Some taxpayers claim that the Comprehensive Social Security Assistance (CSSA) discourages people from being employed and productive. Some taxpayers also think the system is unfair. However, there are also people who are discontented about the increasing problem of income inequality and urge the government to take it seriously. (a)

(i)

Explain the argument held by some taxpayers that more people prefer not to be employed if there is CSSA.

(2 marks)

(ii) What are the two principles of equity in economics? Why do some taxpayers think the system is unfair?

(6 marks)

(b) Explain two methods for the government to narrow the income gap.

(4 marks)

## (a)

(i)

The assistance from the CSSA narrows the income gap between working and non-working people. As the cost of being unemployed is lower, more people prefer to be unemployed. (2 marks)

(ii) Equalising outcome: This is an idea of fairness which seeks to reduce or eliminate differences in income and/or wealth among individuals or households in an economy. (2 marks) Equalising opportunities: This is an idea of fairness that ensures different people in similar situations be treated similarly.

(2 marks)

- Those taxpayers criticising the CSSA think that a person's income should be determined by his or her effort. The fact that some people can receive subsidy from the CSSA without working is in the view of unfair for those taxpayers who work hard for a living. - any reasonable answer(s) (Mark the FIRST point only, 2 marks) (b) - The government may adopt a progressive tax system. Since the high-income group pays a larger proportion of their income as tax than the low-income group, the income gap is narrowed. - The government may redistribute income from the high-income group to the low-income group by means of transfers. This also helps narrow the income gap. - any reasonable answer(s) (Mark the FIRST point only, 2 marks) ##


14-51


|!|EL34005|!| (a)

What is a proportional tax?

(2 marks)

(b) “Imposing a proportional tax alone has no effect on income distribution.” Do you agree? Explain your answer. (c)

(3 marks)

“A per-unit sales tax harms efficiency but does not improve income inequality. Therefore, it should never be adopted.” Discuss the validity of this statement.

(4 marks)

## (a)

A proportional tax is a tax that takes up the same percentage of income from all income groups. (2 marks)

(b) Yes.

(1 mark)

Since all income groups pay the same percentage of their income as tax, the income difference between any two income groups remains the same. Therefore, there is no effect on income distribution. (c)

(2 marks)

A per-unit sales tax leads to a deadweight loss. The resulting resource allocation is inefficient. (1 mark) Since the same amount of tax takes up a greater proportion of income from the low- income group, the tax is a regressive tax. Therefore, income inequality tends to increase.

(1 mark)

Despite the above shortcomings, a sales tax has a wide tax base and hence is a source of stable government revenue.

(1 mark)

Therefore, it is not true that it should never be adopted.

(1 mark)

##


14-52


|!|EL34006|!| Places

Gini coefficient

Hong Kong

0.53 (highest among Asian cities)

Beijing

0.22 (lowest in the world)

Cities in Asia (average of 38 cities)

0.4

Cities in US (average)

> 0.4

(Source: State of the World's Cities Report 2008/9: United Nations Human Settlements Programme (UN-HABITAT))

(a)

Explain two shortcomings of using the Gini coefficient for international comparisons of income inequality.

(4 marks)

(b) Explain whether we can conclude that Hong Kong's problem of income inequality is the most serious among Asian cities based on the above information. Give some recommendations on how to compare income inequality among countries more accurately. (c)

(7 marks)

John and Mary were classmates at the same university with similar academic results, but they are earning significantly different incomes now. Explain TWO factors which may account for the income difference.

(4 marks)

## (a)

- Different places may use different types of income data. For instance, before-tax income and post-tax income yield different outcomes.

(2 marks)

- Even if different countries use the same income data, it is still possible for two countries with the same Gini coefficient to have different income distributions.

(2 marks)

(b) Because of the reasons mentioned in (a), we cannot conclude that Hong Kong's income inequality problem is the most serious among Asian cities based on the above information alone.

(1 mark)

To make a more accurate comparison, we should consider the types of income measured. (2 marks) Instead of comparing the Gini coefficient directly, we can compare the direction of change in the Gini coefficient among different economies over a period of time.

(2 marks)

Furthermore, factors which affect the value of the Gini coefficient, such as population structure and family structure, should be considered before reaching any conclusions. (c)

(2 marks)

Reasons include: - Difference in natural abilities: People’s intelligence, appearance and creatively can be very different.


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- Difference in education and training: From the employer’s point of view, well-educated and well-trained are worth higher pay than workers who possess less skill and/or knowledge. - any reasonable answer(s) (Mark the FIRST TWO points only, 2 marks each) ##


14-54

Chapter 14 Efficiency, Equity and the Role of Government (II)

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