8.2 Equity and Redistribution of Income and Wealth

2026 Syllabus Objectives

By the end of these notes, you should be able to:

  1. Explain the difference between equity and equality
  2. Explain the difference between equity and efficiency
  3. Distinguish between absolute poverty and relative poverty
  4. Explain what the poverty trap is and how it works
  5. Evaluate policies towards equity and equality, including negative income tax, universal and means-tested benefits, and universal basic income

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Objective 1: Equity vs. Equality

These two words look and sound very similar, but in economics they mean very different things. It is essential that you do not confuse them.

Equality means giving everyone exactly the same thing — the same amount of income, the same resources, the same opportunities. Equality is about identical shares. Think of it like cutting a cake into perfectly equal slices, regardless of whether each person is hungry or not.

Equity means fairness. It is about distributing income or resources in a way that is considered just or fair, even if the result is not perfectly equal. The key word here is fairness. Equity recognises that people have different needs, different starting points in life, and different circumstances — and that true fairness might mean giving more to those who need it more.

Example to make this clear:

  • Imagine three students trying to watch a football match from behind a fence. The tallest student can already see. The middle student can barely see. The shortest student cannot see at all.
  • Equality = give every student the same size box to stand on. The tall student still sees best, and the short student might still struggle.
  • Equity = give the shortest student the biggest box, the middle student a smaller box, and the tallest student no box at all. Now everyone can see equally well.

In economics, income equality would mean everyone earns the same wage. Income equity would mean distributing income in a way that is considered fair — perhaps meaning those who work harder, contribute more, or have greater needs receive appropriately different amounts.

Key point: Equality focuses on sameness. Equity focuses on fairness. A society can have more equity without having perfect equality, and it can have equality without having equity.

Wealth vs. Income — a quick note:

  • Income is the flow of money a person receives over time (e.g., wages, rent, interest). Think of it like water flowing into a bucket every month.
  • Wealth is the total stock of assets a person owns at any point in time (e.g., property, savings, shares). Think of it like all the water that has accumulated in the bucket over many years.

Governments care about both income distribution and wealth distribution because inequality in either can cause social and economic problems.

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