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

This guide follows the AQA AS and A-level Economics specification (version 1.3, 29 June 2022), first taught from September 2015. It covers 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). The combined PDF prints these as 4.1.7.2 and 4.1.7.3; the AQA website numbers the A-level content 3.1.7.2 and 3.1.7.3. Lorenz curves, Gini coefficients and the income-versus-wealth distinction belong to 3.1.7.1 and are not repeated here.

Links: the AQA A-level Economics hub, the printable checklist, the revision notes, the practice questions, the wider individuals, firms, markets and market failure guide and the free 10-minute diagnostics. Every country, firm and figure below is invented for illustration.

Absolute and relative poverty

Absolute poverty means income too low to afford the basic necessities of life (food, shelter, clothing, heating). The line is fixed in real terms, so it moves only with prices. Relative poverty means income low compared with others in the same society, usually below a set share of the median income, such as 60%. The line moves whenever typical incomes move.

Worked example: two poverty lines

Ten households in Country A (illustrative) have monthly incomes of 450, 650, 800, 1,000, 1,500, 1,900, 2,100, 2,500, 3,200 and 5,000.

1. Median = (1,500 + 1,900) / 2 = 1,700.
2. Relative line = 60% of 1,700 = 1,020. Households below it: 450, 650, 800, 1,000, so 4 of 10, or 40%.
3. Absolute line (cost of a basic basket) = 700. Households below it: 450 and 650, so 20%.
4. Now every income rises 20% with no price change. New median = 2,040, so the relative line is 1,224. New incomes of the lowest four are 540, 780, 960 and 1,200, all below 1,224: still 40%.
5. The absolute line stays at 700. Only 540 is below it: 10%.

Conclusion: equal-percentage growth cut absolute poverty from 20% to 10% and left relative poverty at 40%. Relative poverty responds to the shape of the distribution, not to the level of income.

Depth of poverty. The shortfalls below the relative line in step 2 are 570, 370, 220 and 20: total 1,180, average 295, about 28.9% of the line. Equal headcounts can hide very different depths.

Benefits and the relative line. Suppose the median is 2,000 and a household lives on a benefit of 900, which is 45% of the median. If the median rises 5% to 2,100 and the benefit rises 2% to 918, the benefit is 918 / 2,100 = 43.7% of the median. If prices rose 2%, the household’s real income is unchanged, so absolute poverty is unchanged, yet relative poverty has deepened.

Why both matter. Absolute measures show whether needs are met. Relative measures capture exclusion from what is normal in a society, but can show “poverty” rising while real incomes rise. The absolute basket is arbitrary and quickly outdated.

Causes of poverty

Cause	Chain of reasoning
Unemployment	No wage income, so reliance on benefits that are often below the relative line
Low pay	Low-skilled workers with weak bargaining power earn little even when employed
Low skills and education	Low productivity, so low marginal revenue product and low wages
Structural change	Decline of an industry or region leaves workers with unwanted skills: structural unemployment
Ill-health and disability	Reduced earning capacity, extra costs, shorter working life
Household type and age	Lone parents, large families and some pensioners have fewer earners per dependant
Discrimination	Lower pay or fewer jobs for some groups regardless of productivity
Low wealth	No savings or assets to cushion shocks; unequal ownership passes disadvantage on
Inadequate or poorly uprated benefits	Transfer income falls behind the median
Market failure	Under-consumption of merit goods such as education; imperfect information

A cycle of deprivation arises when poor children receive weaker education, earn less and raise their own children in poverty.

Effects of poverty

• Individuals: poorer health, lower educational attainment, shorter life expectancy and reduced life chances.
• Society: social exclusion, higher crime in some areas, weaker social mobility.
• The economy:
  1. Lower human capital means lower productivity and long-run aggregate supply.
  2. Unemployed and ill workers mean lost output and a lower production possibility frontier.
  3. Higher welfare and health spending, with an opportunity cost for other public spending.
  4. Poor households spend most of any extra income, so low incomes depress aggregate demand in some local markets.
  5. Reduced social mobility wastes talent, an inefficient allocation of labour.

Policies to alleviate poverty and influence distribution

Taxation

A progressive tax takes a higher percentage of income as income rises. A regressive tax takes a lower percentage. A proportional tax takes the same percentage.

Worked example: progressive income tax. Country C (illustrative) taxes monthly income at 0% up to 1,000, 20% from 1,000 to 4,000 and 40% above 4,000.

Income	Tax	Average rate	Net income
800	0	0%	800
2,500	20% x 1,500 = 300	12.0%	2,200
6,000	600 + 40% x 2,000 = 1,400	23.3%	4,600
12,000	600 + 40% x 8,000 = 3,800	31.7%	8,200

The ratio of top to bottom income falls from 12,000 / 800 = 15 before tax to 8,200 / 800 = 10.25 after tax. The marginal rate exceeds the average rate, so the average rate rises with income.

Worked example: a regressive effect. Suppose a sales tax adds 20% to the pre-tax price. A household with 800 net income spends all of it, so tax paid = 800 / 1.2 x 0.2 = 133.33, or 16.7% of income. A household with 8,200 spends only 4,100, paying 683.33, or 8.3%. Taxes on necessities hit the poor hardest, so cutting them (or zero-rating basic goods) is a redistribution tool.

Taxes on wealth, inheritance and capital gains target asset ownership rather than income.

Transfer payments and benefits

• Means-tested benefits are paid only when income or assets fall under a set threshold. Universal benefits go to everyone in a category regardless of income. Contributory benefits depend on past payments.
• In-work benefits top up low earnings. A negative income tax or universal basic income guarantees a floor to everyone.

Worked example: targeting. Region B (illustrative) has 100,000 households, of which 15,000 are poor.

• Means-tested payment of 3,000 a year, 80% take-up, administration costing 10% of payments: claimants 12,000, payments 36.0m, administration 3.6m, total 39.6m. Each pound reaching a poor household costs 1.10. But 3,000 poor households (20%) receive nothing.
• Universal payment of 600 to every household: cost 60m. Poor households receive 15,000 x 600 = 9.0m, 15% of the bill, so each pound reaching the poor costs 6.67.

Means-testing is cheaper per pound delivered, but non-take-up (through stigma, complexity or ignorance) leaves poverty. Universal benefits reach everyone and may keep wide political support, but are costly and poorly targeted.

The poverty trap

Means-tested benefits are withdrawn as earnings rise, which acts like a tax on extra earnings.

Worked example. Income tax is 10% of all earnings. A benefit of 500 a month is cut by 50p for every pound earned (reaching zero at earnings of 1,000). Net income = 0.9 x earnings + the remaining benefit.

Earnings	Tax	Benefit	Net income
0	0	500	500
400	40	300	660
800	80	100	820
1,000	100	0	900
1,200	120	0	1,080

Moving from 0 to 400 of earnings raises net income by only 160: the household keeps 40p of each extra pound, an effective marginal tax rate of 60% (10% tax plus 50% withdrawal). It stays at 60% up to earnings of 1,000. Above 1,000 the household keeps 90p of each pound. The poverty trap is this weak reward to earning more; the unemployment trap is the weak gain from taking any job at all.

Wages and labour markets

Worked example: a minimum wage in a competitive market. Demand for hours is L = 1,000 - 50W and supply is L = 100W - 500 (L in hundreds of hours, W the hourly wage).

1. Equilibrium: 1,000 - 50W = 100W - 500, so W = 10 and L = 500.
2. A minimum of 11: demand = 450, supply = 600. Employment falls by 50 and there are 150 more people seeking work than jobs.
3. Wage bill falls from 10 x 500 = 5,000 to 11 x 450 = 4,950. Workers keeping jobs gain 450 x 1 = 450; those losing jobs lose 50 x 10 = 500.
4. Arc elasticity of demand = (-50 / 475) / (1 / 10.5) = -1.1, so demand is elastic over this range and the wage bill falls.

Monopsony. If one employer dominates, the wage is below the marginal revenue product. With supply W = 5 + 0.01L, the marginal cost of labour is 5 + 0.02L. Marginal revenue product is 20 - 0.02L. Setting them equal: L = 375 and W = 8.75, while MRP is 12.5. A minimum of 10 makes both employment and pay rise to 500 and 10; a minimum of 11 gives employment 450, still above 375. Only above 12.5 does employment fall below 375.

Provision, education and regional policy

• Free or subsidised education, healthcare, housing and childcare raise living standards in kind and tackle merit-good under-consumption.
• Education and training raise human capital, attacking a root cause, but take years to work.
• Regional policy, infrastructure and enterprise support create jobs where structural unemployment is concentrated.
• Anti-discrimination law and macroeconomic policy for full employment also help.

Economic consequences of redistribution

• Incentives: high marginal tax rates may reduce effort, hours or enterprise, and generous benefits may reduce job search. The size of the effect depends on how responsive people are.
• Fiscal cost: more spending means higher taxes or borrowing, and an opportunity cost.
• Tax avoidance and mobility: wealth and high earners may move capital or themselves abroad, shrinking the tax base.
• Aggregate demand: poorer households have a higher marginal propensity to consume. Suppose 100m is taxed from households consuming 60% of extra income and paid to households consuming 90%. Initial consumption changes by -60 + 90 = +30m. With a multiplier of 2, income rises by 60m. This helps only if there is spare capacity.
• Efficiency and growth: health and education spending can raise potential output; high marginal rates can lower it.

Evaluating approaches: moral and political perspectives

The specification expects you to recognise that views about redistribution rest on value judgements.

• Utilitarian argument: an extra pound gives more satisfaction to a poor household than a rich one, so redistribution raises total welfare.
• Rawlsian argument: if you did not know your place in society, you would choose a system that protects the worst off.
• Libertarian argument: people are entitled to what they earn; compulsory transfers violate property rights.
• Equality of opportunity versus outcome: the right favours opportunity-based policies (education, a flexible labour market), the left is more willing to equalise outcomes through tax and benefits.
• Left and right: interventionist views accept higher taxes and universal provision; market-based views prefer lower taxes, work incentives, targeted help and growth.

Evaluation checklist: identify who gains and loses; separate positive claims (a measurable effect) from normative ones (what is fair); consider size, time lags, work-effort responses and cost; then give a judgement tied to the objective, such as reducing absolute or relative poverty.

Common errors

• Treating relative poverty as “the bottom 10%”. It is a line at a share of median income.
• Saying growth always reduces poverty. It cuts absolute poverty if the poor share in it, but need not touch relative poverty.
• Calling a policy progressive because it spends on the poor. Progressivity describes how a tax changes as a percentage of income.
• Forgetting benefit withdrawal when discussing incentives.
• Giving political labels without analysis. Name the value judgement, then show how it changes the conclusion.

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.