Cambridge A Level Economics: Equity, equality, poverty and redistribution policies (9708) – Revision Notes

These notes condense section 8.2 (Equity and redistribution of income and wealth) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 8 is A Level content, so it is not examined at AS. For full explanations and longer worked examples, read the study guide, then test yourself with the practice questions. The Cambridge A Level Economics hub and the printable checklist show the whole course, and a free 10-minute diagnostic finds weak spots. All figures below are invented for illustration.

Key definitions

Term	Meaning
Equality	The same outcome or the same treatment. Measurable.
Equity	Fairness. A normative judgement, so people disagree.
Horizontal equity	Equals are treated equally.
Vertical equity	Unequals are treated differently in a way judged fair.
Efficiency	Using scarce resources to produce the most, without waste.
Absolute poverty	Income below a fixed level needed for basic needs.
Relative poverty	Income low compared with others, often below 50% or 60% of median income.
Poverty trap	Little or no gain in income from earning more, because benefits are lost and tax rises.
Effective marginal tax rate	Share of an extra unit of earnings lost to tax and lost benefit.
Negative income tax	A guaranteed income paid to those with low earnings, reduced at a rate t as earnings rise, so tax is paid above break-even.
Universal benefit	Paid to everyone in a group, with no income test.
Means-tested benefit	Paid only if income or wealth is below a set level.
Universal basic income	A regular payment to every individual with no means test or work condition.

8.2.1 Equity versus equality

• Equality describes a distribution. Equity is a verdict on it.
• Equal treatment can be inequitable: a fixed charge of 600 for all takes 12% of an income of 5,000 but 1.2% of 50,000.
• Unequal outcomes can be judged equitable if they reflect effort, skill or risk.
• Different people hold different views of fairness, so always say whose view you use.

8.2.2 Equity versus efficiency

Trade-off arguments (equity costs efficiency).

• High marginal tax rates reduce the reward from work, saving and enterprise.
• Generous benefits may reduce the incentive to take a job.
• Administration absorbs resources.
• Redistribution is not a Pareto improvement, as some lose.

Counter-arguments (no conflict, or a gain).

• Spending on education and health raises productivity and uses wasted talent.
• Severe inequality can damage demand, stability and growth.
• Disincentives may be small, depending on how people respond.

Small worked reminder. A tax of 25% on pay between 8,000 and 20,000 and 40% above 20,000. A worker on 20,000 takes 500 of extra pay. Tax is 0.4 × 500 = 200, so the worker keeps 300, or 60%. Compare with 75% kept below 20,000.

8.2.3 Absolute versus relative poverty

Method in steps.

1. Put the incomes in order and find the median.
2. Multiply the median by the percentage line (for example 0.5) to get the relative line.
3. Count the households below the relative line, and separately below the fixed absolute line.
4. Divide each count by the total to get the percentage.

Worked reminder (Country R, monthly income per person). Five households have 300, 500, 800, 1,200 and 2,500. The absolute line is 520.

• Median = 800. Relative line (50%) = 400. Relative poverty: 300 only, so 1 of 5 = 20%.
• Absolute poverty: 300 and 500 are below 520, so 2 of 5 = 40%.
• Every income rises by 25%: 375, 625, 1,000, 1,500 and 3,125. The median is 1,000 and the line 500. Only 375 is below it, so relative poverty is still 20%.
• Absolute poverty: 375 is below 520 but 625 is not, so it falls to 1 of 5 = 20%.

Change	Absolute poverty	Relative poverty
All incomes rise by the same percentage	Falls	Unchanged
Only the higher incomes rise, so the median rises	Unchanged	Rises
Lower incomes rise faster than the median	Falls	Falls

Evaluating the two measures.

• Absolute poverty shows deprivation in real terms, but the basic-needs line is a judgement and differs between countries.
• Relative poverty shows exclusion and inequality, but a rich country can have high relative poverty with high living standards.
• Both ignore wealth, household size and unpaid work.

8.2.4 The poverty trap

Effective marginal tax rate = income tax rate + benefit withdrawal rate (when benefit is withdrawn on gross earnings).

Worked reminder. Tax is 25% and the benefit is cut by 50 for every 100 earned. Each extra 200 earned costs 50 in tax and 100 in lost benefit. The person keeps 50, so the effective marginal tax rate is 75%.

Causes.

• Means-tested benefits withdrawn steeply as earnings rise.
• Income tax and social contributions starting at low incomes.
• Costs of working, such as childcare and transport.
• Low skills, so higher earnings are hard to reach.

Effects. Weak incentive to work more, so labour is under-used. The trap keeps households poor and widens the gap, and the poorest face the highest marginal rates.

Remedies.

• A slower benefit withdrawal, which costs more because more people qualify.
• Letting people keep some earnings before benefit falls.
• Childcare support and training.
• Moving to a negative income tax or a basic income.

8.2.5 Policies

Negative income tax

Payment = G − t × Y. Break-even income = G ÷ t. Net income = Y + G − tY.

Worked reminder. G = 4,800 and t = 50%, so break-even = 9,600.

• Earnings 6,000: payment = 4,800 − 3,000 = 1,800, net income = 7,800.
• Earnings 12,000: payment = 4,800 − 6,000 = −1,200, so the person pays 1,200 and net income = 10,800.

For: a clear income floor, targeted at low earners, a constant incentive to work, one simple system. Against: a high G or low t raises cost, a high t weakens incentive, it needs accurate income reporting, and it may be politically hard to accept.

Universal against means-tested benefits

Worked reminder. A meal voucher worth 400 for 50,000 pupils. Universal cost = 20 million. Targeted at the poorest 30% (15,000 pupils) = 6 million, plus 0.9 million administration, so 6.9 million. Leakage under the universal scheme is the 35,000 pupils outside the target group, who receive 14 million.

	Universal	Means-tested
Strength	Simple, full take-up, no stigma, no trap	Targeted, lower cost for each unit that reaches the poor
Weakness	Costly, much goes to those not in need	Administration, stigma, missed claims, poverty trap

Universal basic income

Worked reminder. 500,000 adults receive 3,600 each, so gross cost = 1.8 billion. If 0.6 billion of benefits is replaced, the net cost is 1.2 billion. With taxable income of 12 billion, a flat tax of 10% pays for it. A person on 18,000 pays 1,800, so the net gain is 3,600 − 1,800 = 1,800. Break-even income is 3,600 ÷ 0.10 = 36,000.

For: simple, no stigma, removes the trap, security. Against: high cost and taxes, may reduce hours (income effect) or not (the substitution effect favours work, compared with a withdrawn benefit), may be inflationary if supply is inelastic, and losers exist if it replaces larger targeted benefits.

Evaluation checklist

Poverty reduction, incentives, cost and funding, administration and take-up, political support, time, and the size of the payment.

Must-know distinctions

• Equity against equality: fairness against sameness.
• Absolute against relative poverty: fixed line against moving line.
• Universal against means-tested: breadth against targeting.
• NIT against UBI: a payment that tapers away against a payment to all, financed by tax. With a flat tax, the two give the same net income for the same G and t.

Quick self-test

1. A flat charge of 900 is levied on every adult. What share of income does it take from someone earning 6,000?
2. Country S has incomes of 200, 400, 600, 900 and 1,500. State the median and the 60% relative line.
3. How many of the five households in question 2 are in relative poverty?
4. If all incomes in question 2 double, does relative poverty change?
5. A benefit is cut by 70 per 100 earned and tax is 20%. State the effective marginal tax rate.
6. Under the system in question 5, how much does a person keep from an extra 500?
7. A negative income tax has G = 3,000 and t = 20%. Find break-even income.
8. Using question 7, find net income for someone earning 5,000.
9. Give one reason a means-tested benefit may have low take-up.
10. A basic income of 2,000 is paid to 100,000 adults. What is the gross cost?
11. Give one way greater equity could improve efficiency.

Answers

1. 900 ÷ 6,000 = 15%.
2. Median = 600. Line = 0.6 × 600 = 360.
3. Only 200 is below 360, so 1 of 5.
4. No. Incomes become 400, 800, 1,200, 1,800 and 3,000. The median is 1,200 and the line 720, so only 400 is below it: still 1 of 5.
5. 20% + 70% = 90%.
6. 10% of 500 = 50.
7. 3,000 ÷ 0.2 = 15,000.
8. Payment = 3,000 − 0.2 × 5,000 = 2,000. Net income = 7,000.
9. Stigma, lack of information or a complex application.
10. 2,000 × 100,000 = 200 million.
11. Support for education or health raises productivity and brings unused talent into work.

Where marks are usually lost

• Writing “equity” when you mean “equality”, or the reverse.
• Treating a fair outcome as a fact rather than a judgement.
• Comparing a poverty line without finding the median first.
• Saying growth always reduces relative poverty.
• Stating that benefits cause the poverty trap without linking it to the withdrawal rate.
• Adding the tax rate to the benefit rate but forgetting what the benefit rate applies to.
• Listing the policies without ranking or judging them.
• Ignoring cost, funding and take-up when judging a benefit.
• Giving a conclusion that does not follow from the points made.

Official syllabus

Cambridge International AS & A Level Economics 9708, syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International Education), section 8.2.