Objectives beyond the main four: the environment and the distribution of income and wealth

Overview

Government adopt environmental objectives alongside targets for output and prices, increase in GDP not and income inequality concern a government when average income is rising.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Why does a government adopt environmental objectives alongside targets for output and prices?

   Model answer

   Production and consumption generate external costs such as emissions and pollution that are borne by third parties and by future generations, and these costs never appear in the price of the goods concerned. Markets therefore over-produce the activities that cause them. An explicit environmental objective forces the cost into the policy calculation, where the price mechanism has failed to do so.

2. 2

   Why does an increase in GDP not, on its own, tell you whether the country has become better off environmentally?

   Model answer

   GDP adds up the market value of output and treats the spending that repairs environmental damage as a positive contribution, so a clean-up after a spill raises GDP. It makes no deduction for the depletion of natural resources or for emissions, because these are not traded and have no market price. A country can therefore record rising GDP while running down the natural capital its future output depends on.

3. 3

   How does a binding emissions target act as a constraint on the pursuit of other objectives?

   Model answer

   If output can only be produced using processes that emit, then a ceiling on emissions is effectively a ceiling on output from those processes until cleaner technology arrives. Meeting the target requires either producing less, which slows growth, or investing in abatement, which diverts resources from other uses. The constraint binds hardest on energy-intensive industries, so it also has consequences for employment in particular regions.

4. 4

   Why should income inequality concern a government when average income is rising?

   Model answer

   An average conceals the distribution, so mean income can rise while the incomes of those at the bottom stagnate or fall. An extra pound is generally worth more to a low-income household than to a high-income one, so a given total income yields more welfare when it is less unequally spread. Wide inequality is also associated with reduced social mobility and with political instability, both of which have economic costs.

5. 5

   What is the difference between income and wealth, and why does a government treat their distributions separately?

   Model answer

   Income is a flow received over a period, such as wages, interest and benefits, whereas wealth is a stock of assets held at a point in time, such as property, pensions and shares. Wealth is accumulated from past saving and inheritance, so its distribution reflects decades of history rather than this year's earnings. The policy instruments differ too: income is reached through income tax and benefits, while wealth is reached through capital taxes and inheritance tax.

6. 6

   Why is the distribution of wealth typically more unequal than the distribution of income?

   Model answer

   Wealth is the accumulation of past unspent income, so small differences in saving rates compound into large differences in stocks over a lifetime. Higher-income households can save a larger share of their income, and the assets they buy generate returns that are themselves saved. Inheritance transmits the resulting concentration across generations, while many households hold almost no assets at all, so the bottom of the wealth distribution can sit at or below zero.

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