AQA A-level Economics: Poverty and government policies on poverty and redistribution (7136) – Revision Notes

These notes condense The problem of poverty (3.1.7.2) and Government policies to alleviate poverty and to influence the distribution of income and wealth (3.1.7.3) from the AQA AS and A-level Economics specification, version 1.3, first taught from September 2015. The combined PDF prints them as 4.1.7.2 and 4.1.7.3. For full explanations start with the study guide, then test yourself with the practice questions.

Other links: the AQA A-level Economics hub, the printable checklist, the free 10-minute diagnostics and the microeconomics revision notes. All figures are invented.

Definitions

Term	Meaning
Absolute poverty	Income below the level needed for basic necessities, fixed in real terms
Relative poverty	Income below a set share (often 60%) of the median in that society
Poverty gap	How far below the line a household’s income lies
Progressive tax	Takes a rising percentage of income as income rises
Regressive tax	Takes a falling percentage of income as income rises
Means-tested benefit	Paid only below an income or asset threshold
Universal benefit	Paid to a whole category regardless of income
Poverty trap	Weak gain from higher earnings because benefits are withdrawn and tax is paid
Unemployment trap	Weak gain from taking a job at all
Positive v normative	A testable claim v a value judgement about what ought to be

Measuring poverty: method in steps

1. Put incomes in order and find the median (mean of the middle two if the number is even).
2. Relative line = chosen percentage x median.
3. Count households below the line, then divide by the total for the headcount percentage.
4. For the absolute line, use the fixed cost of the basket and ignore the median.
5. After any change, recompute both lines separately.

Worked reminder. Households have incomes of 900, 1,400, 2,000, 2,600 and 4,100. Median = 2,000; 60% line = 1,200; one household below it, so 20%. If all incomes rise 10%, the median is 2,200, the line is 1,320 and the lowest household (990) is still below it: relative poverty is still 20%. With an absolute line of 1,000, the lowest household was below it before (900) and after (990), so absolute poverty is unchanged here, but a 15% rise would take it to 1,035 and out.

Key distinction: equal-percentage growth can change the absolute line’s headcount but leaves the relative headcount unchanged, unless low incomes grow faster or slower than the median.

Causes and effects: recall grid

Group	Points
Labour market causes	Unemployment, low pay, low skills, structural change, discrimination
Personal and household causes	Ill-health, disability, age, lone-parent or large households, low wealth
Policy and market causes	Benefits below the relative line or poorly uprated, under-consumption of merit goods, imperfect information
Effects on people	Poor health, lower attainment, exclusion, reduced life chances
Effects on the economy	Lower human capital and productivity, lost output, higher welfare cost, weak social mobility, wasted talent
Cycle of deprivation	Poor children, weaker education, low pay, poor adults, poor children again

Policies: what each does and its trade-offs

Policy	How it helps	Costs and evaluation
Progressive income tax	Narrows post-tax gaps	Work incentives, avoidance, depends on rates and thresholds
Wealth and inheritance taxes	Tackles unequal assets	Avoidance, capital mobility, valuation difficulty, small yield
Cutting taxes on necessities	Helps poor households most	Costly in revenue, benefits better-off too
Means-tested benefits	Target the poor, lower cost	Poverty trap, stigma, non-take-up, administration
Universal benefits	Full coverage, simple, political support	High cost, much goes to the non-poor
In-work benefits	Raise returns to low-paid work	Cost, may let wages stay low
Minimum wage	Raises pay of those in work	Job losses if demand elastic; may raise employment under monopsony
Free or subsidised education, health, housing	In-kind help, merit goods	Opportunity cost, quality and rationing issues
Education and training	Raise productivity and pay	Slow, uncertain, high cost
Regional and employment policy	Creates jobs where unemployment is concentrated	Slow, may be inefficient, crowding out
Basic income or negative income tax	Guaranteed floor, simpler	High cost or low payment, work-incentive debate

Formulae and quick calculations

Item	Method
Relative line	Share x median
Headcount rate	Number below line / total x 100
Average tax rate	Tax / income x 100
Effective marginal tax rate	Tax rate + benefit withdrawal rate on the extra pound
Take-up rate	Claimants / eligible households
Target efficiency	Money reaching the poor / total spending
Benefit v median	Benefit / median x 100

Tax reminder. Tax-free up to 1,200, 30% above. Income 3,000: tax = 30% x 1,800 = 540, average rate 18%. Income 6,000: tax = 30% x 4,800 = 1,440, average rate 24%. Because the percentage taken climbs, the tax is progressive.

Trap reminder. Tax 25% plus benefit withdrawal 55% gives an effective marginal tax rate of 80%: the household keeps 20p of each extra pound.

Must-know distinctions

• Absolute v relative poverty: fixed real standard v share of median.
• Progressive v regressive: look at the percentage of income, not the amount of money.
• Means-tested v universal: targeting and cost against take-up and simplicity.
• Equality of opportunity v outcome: the first is about starting points, the second about final incomes.
• Positive v normative: “the policy raises employment” is testable; “the policy is fair” is a value judgement.
• Short run v long run: cash transfers help at once; education works slowly but may reduce dependency.

Moral and political perspectives

Perspective	Argument	Policy leaning
Utilitarian	Extra income gives more benefit to the poor, so redistribution raises total welfare	Progressive tax and transfers
Rawlsian	Design society as if you did not know your place in it, so protect the worst off	Strong safety net
Libertarian	People own what they earn; coercive transfers are wrong	Low tax, voluntary charity
Market-based	Growth and incentives reduce poverty most	Lower tax, targeted help, supply-side
Interventionist	Markets generate and entrench poverty	Higher tax, universal provision

Evaluation tools

• Compare absolute and relative aims: a policy may help one and not the other.
• Time horizon: transfers act now, supply-side policies later.
• Scale and elasticity: how large is the work-effort response, and who bears the cost?
• Alternatives and opportunity cost: what else could the money do?
• Conclude with a stated judgement tied to a stated objective, and name the value judgement behind it.

Quick self-test

1. State what makes poverty “relative”.
2. Eight households have incomes of 500, 900, 1,300, 1,500, 2,300, 2,500, 3,000 and 4,000. Find the 60% median line and the percentage below it.
3. All eight incomes rise 15%, prices are unchanged and the absolute line is 1,000. Find the percentage below each line after the rise.
4. Tax is 25% and a benefit is withdrawn at 55p per pound earned. How much of an extra 100 earned does the household keep?
5. Find the average tax rate on an income of 3,000 when income is untaxed to 1,200 and taxed at 30% above.
6. A universal payment of 250 goes to 40,000 households, of which 8,000 are poor. State the cost and the percentage reaching poor households.
7. Give one reason why low take-up weakens a means-tested benefit.
8. Why might a minimum wage raise employment?
9. A benefit of 800 is half the median of 1,600. The median rises 10% and the benefit 5%. What is the benefit as a percentage of the median?
10. Is “redistribution is fair” positive or normative?

Answers

1. Income is low compared with a share (such as 60%) of the median in the same society.
2. Median = (1,500 + 2,300) / 2 = 1,900; line = 1,140; incomes 500 and 900 are below it: 2 of 8 = 25%.
3. New median = 2,185, so the relative line is 1,311. Incomes of 575 and 1,035 are below it: 25%. Absolute line 1,000: only 575 is below it: 1 of 8 = 12.5%.
4. Withdrawal plus tax = 80%, so the household keeps 20.
5. Tax = 30% x 1,800 = 540; 540 / 3,000 = 18%.
6. Cost = 40,000 x 250 = 10m; poor households receive 8,000 x 250 = 2m, which is 20%.
7. Eligible poor households that do not claim receive no help, so poverty persists.
8. If one employer holds wage-setting power, a minimum between the current wage and the competitive wage can raise both pay and the number hired.
9. Median = 1,760; benefit = 840; 840 / 1,760 = 47.7%. Relative poverty has deepened.
10. Normative, because it is a value judgement.

Where marks are usually lost

• Using the mean instead of the median for a relative line.
• Counting households on the line as below it.
• Assuming that growth must cut relative poverty.
• Writing “progressive” when describing the amount of tax rather than the percentage of income.
• Ignoring benefit withdrawal when explaining incentives.
• Listing causes of poverty without a chain of reasoning to a lower income.
• Giving policies one-sided: every policy needs a cost, a time lag or an incentive effect.
• Stating a political view without showing the economic mechanism.
• Ending without a judgement tied to the objective.

Official syllabus

The AQA AS and A-level Economics specification (7135 and 7136), version 1.3, 29 June 2022, published by AQA, first taught from September 2015.