Explain how the Lorenz curve and the Gini coefficient are used to measure income inequality.

Discuss the view that the best way to achieve greater equity in the distribution of income in a country is to use a progressive tax system.

Answers may include:

• definitions of income inequality, Lorenz curve and Gini coefficient
• diagram to show the Lorenz curve and Gini coefficient
• explanation of how the Lorenz curve and Gini coefficient are used to measure income inequality
• examples of income inequality.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of equity and progressive taxation
• diagram (Lorenz curve) to show a progressive tax redistributing income with greater equity
• explanation of how a progressive tax system can redistribute with greater equity
• examples of where a progressive tax can redistribute income more equitably
• synthesis and evaluation (discuss) of the use of a progressive tax to redistribute income.

N.B. Definitions, theory and examples that have already been given in part (a) and then referred to in part (b) should be rewarded.

Discussion may include: the problems of applying a progressive tax because of tax avoidance, the impact of a progressive tax on incentives and a consideration of other ways of redistributing of income such as spending on public services and transfer payments.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.

The highest achieving responses to this question clearly defined income inequality and explained the Lorenz curve and Gini coefficient using an effective diagram. Income inequality for a country was shown through the shape of the Lorenz curve and size of the Gini coefficient. It was also important to support this with a real-world example.

This question proved challenging to candidates and it may well have been the reason relatively few candidates chose to answer it. Effective answers focused on the concept of equity and how the use of progressive tax can achieve greater equity. This could be done, for example, by taxing those on high incomes at a higher rate and using the money raised to fund public services, like further education, which give people on lower incomes greater working opportunities. Responses with effective synthesis and evaluation involved, for example, looking at the problems collecting tax from the very richest people and making sure spending by governments is done efficiently.