Explain how government expenditures are used to promote equity in the distribution of income.

Evaluate the impact on efficiency in the allocation of resources when the government uses taxation to promote equity.

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

Answers may include:

• definitions of government expenditure, equity, distribution of income
• diagram to show two Lorenz curves showing different degrees of inequality
• explanation that governments can provide or subsidize merit goods such as education and health care to benefit those on low incomes and also increase transfer payments
• examples of government expenditure measures to promote equity.

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

Answers may include:

• definitions of allocative efficiency, taxation, equity
• a diagram is not required for this question
• explanation that using taxation can promote equity in the distribution of income but this can lead to negative effects on efficiency. An increase in progressive tax may reduce the incentive to work, reduce FDI in a country and if firms’ costs increase because of higher tax their prices might rise
• examples of where taxation has been used to promote equity
• synthesis or evaluation.

Evaluation may include: consideration of the extent to which there is a trade-off between equity and efficiency and why an attempt to improve equity can have positive and negative effects on efficiency. Evaluation can consider the impact on incentives to work and whether higher taxation does actually lead to disincentives.

There were some good answers to this question with many candidates showing a clear understanding of equity in terms of opportunity and fairness and explaining how government spending on welfare payments, education and healthcare can improve equity. Many students used the Lorenz curve diagram and Gini coefficient to illustrate how equity could be improved by reducing income inequality. 

This was quite a challenging question for students and this was reflected in the answers of candidates. The strongest responses considered how progressive taxation could improve equity, but how it may have a negative impact on worker and entrepreneur incentives which could reduce economic efficiency. It was also good to see students considering how indirect taxation on luxury goods could be used to improve equity but might cause unemployment in those industries which could lead to inefficiency. Too many answers got rather tied up in the way progressive taxation works or drifted onto other areas of taxation that would not really be effective at improving equity.