Cambridge International AS and A Level Economics: Equity, equality, poverty and redistribution policies (9708)

This guide covers 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. Every country, household, firm and figure below is invented for illustration and is not a real statistic.

Start from the Cambridge A Level Economics hub or the printable checklist. After this guide, use the revision notes and the practice questions. The AS-level measures of inequality, the Gini coefficient and the basic redistribution tools are in a separate guide. For the wider topic, see government microeconomic intervention. To find weak spots first, try a free 10-minute diagnostic.

What this guide covers

Outcome	What you must be able to do
8.2.1	Explain the difference between equity and equality
8.2.2	Explain the difference between equity and efficiency
8.2.3	Distinguish absolute poverty from relative poverty
8.2.4	Explain the poverty trap
8.2.5	Explain and evaluate policies towards equity and equality, for example negative income tax, universal and means-tested benefits, and universal basic income

8.2.1 Equity and equality

Equality means people end up with the same, or are treated the same. You can measure it. Equity means fairness. It is a normative judgement: people disagree about what is fair, so you cannot test it with data.

Two kinds of equity matter in analysis:

• Horizontal equity: people in the same circumstances are treated the same.
• Vertical equity: people in different circumstances are treated differently, in a way judged fair, for example higher earners paying a larger share of income in tax.

So equality and equity can conflict. Equal treatment is not always fair.

Worked example 1 (invented). A small bakery has a bonus pool of 6,000 for four staff who worked 40, 40, 30 and 10 hours.

• Equal split: 6,000 ÷ 4 = 1,500 each. Outcomes are equal, but the person with 10 hours receives the same as the person with 40.
• Split by hours: total hours = 120, so the shares are 2,000, 2,000, 1,500 and 500. Outcomes are unequal, and many people would call this fairer.

Worked example 2 (invented). Country P charges every adult a fixed charge of 3,000 per year. Three adults earn 10,000, 20,000 and 60,000.

• Share of income paid: 3,000 ÷ 10,000 = 30%, 15% and 5%.
• Everyone pays the same amount, which is equal treatment. Yet the poorest bears the heaviest burden, so most people would call it inequitable. A 15% income tax would take 1,500, 3,000 and 9,000: the same proportion from each, with the richer paying more in total.

Whether that 15% tax is equitable is still a judgement, so state whose view of fairness you are using.

8.2.2 Equity and efficiency

Efficiency here means using scarce resources to produce the most output or satisfaction, with no waste. Redistribution through taxes and transfers can conflict with it, which is the equity-efficiency trade-off.

Why more equity can cost efficiency.

• High marginal tax rates reduce the reward for extra work, effort, saving or risk-taking.
• Generous benefits may reduce the incentive to take a job.
• Tax collection and benefit administration use real resources.

Worked example 3 (invented). Country P taxes income at 0% up to 10,000, 30% from 10,000 to 30,000 and 50% above 30,000. A worker earning 30,000 is offered 4,000 of extra work.

• Tax on 30,000 = 0.3 × 20,000 = 6,000. Tax on 34,000 = 6,000 + 0.5 × 4,000 = 8,000.
• Extra tax = 2,000, so the worker keeps 4,000 − 2,000 = 2,000, or 50% of the extra pay.

If the worker declines, 4,000 of output and 2,000 of tax are both lost. That is the efficiency cost of the high rate.

Why the conflict is not certain.

• Redistribution can raise efficiency. Spending on education, health or nutrition for poorer households raises productivity and uses talent that would otherwise go unused.
• Very high inequality can cause social tension and weak demand, which damages growth.
• The size of the disincentive depends on how strongly people respond to tax changes.
• A Pareto improvement leaves nobody worse off. Most redistribution takes from some, so it fails that test, yet many accept it on grounds of equity.

8.2.3 Absolute and relative poverty

Absolute poverty means living on an income too low to buy a fixed set of basic needs: food, shelter and clothing. The line is set in real terms and changes only with prices.

Relative poverty means living on an income that is low compared with others in the same society. A common line is a percentage of median income, such as 60%.

Worked example 4 (invented). Ten households in Country P have monthly incomes per person of 400, 650, 900, 1,000, 1,400, 1,700, 2,000, 2,400, 3,100 and 5,000. The absolute line is 700.

• Median = (1,400 + 1,700) ÷ 2 = 1,550. Relative line (60%) = 930.
• Absolute poverty: 400 and 650 are below 700, so 2 of 10 = 20%.
• Relative poverty: 400, 650 and 900 are below 930, so 3 of 10 = 30%.

Scenario A: every income rises by 10%. The median becomes 1,705 and the relative line 1,023. The incomes 440, 715 and 990 are below it, so relative poverty stays at 30%. The absolute line is still 700, and only 440 is below it, so absolute poverty falls to 10%.

Scenario B: the poorer half’s incomes stay the same and the richer half’s rise by 20%. The median becomes (1,400 + 2,040) ÷ 2 = 1,720 and the relative line 1,032. Now 400, 650, 900 and 1,000 are below it: relative poverty rises to 40%. Absolute poverty stays at 20%, as 400 and 650 are still below 700.

Growth can cut absolute poverty while leaving relative poverty unchanged or higher. Relative poverty falls only if poorer households gain faster than the median.

8.2.4 The poverty trap

The poverty trap is a situation in which people on low incomes gain little or nothing, or even lose, when they earn more, because they lose means-tested benefits and pay more tax as earnings rise. The loss of benefit on each extra unit earned works like a tax. Together they give the effective marginal tax rate.

Worked example 5 (invented). In Country P a lone parent receives a means-tested benefit of 9,000. It is cut by 60 for each 100 of gross earnings, and income tax is 20% of earnings. For an extra 100 earned, tax takes 20 and benefit falls 60, so the person keeps 20 and the effective marginal tax rate is 80%.

Gross earnings	Tax (20%)	Benefit (9,000 − 60% of earnings)	Net income
0	0	9,000	9,000
5,000	1,000	6,000	10,000
10,000	2,000	3,000	11,000
15,000	3,000	0	12,000
20,000	4,000	0	16,000

Working 15,000 of earnings raises net income by only 3,000, because 80% of the extra earnings is lost. If work costs 2,500 a year in childcare, the real gain is 500. Beyond 15,000 the benefit has gone, so net income rises by 4,000 for the next 5,000.

Why it matters. The weak reward for working more keeps people in poverty, wastes labour, and means the poorest face the highest marginal rates.

Ways to reduce it.

• A slower benefit withdrawal. At a 40% taper the benefit lasts until 9,000 ÷ 0.4 = 22,500 and the effective marginal tax rate falls to 60%. But more households qualify for help, so the cost rises.
• Childcare support and training to raise earning power.
• A negative income tax or basic income, covered next.

8.2.5 Policies towards equity and equality

Negative income tax

A negative income tax (NIT) merges tax and benefits. The government sets a guaranteed income G and a tax rate t. A household receives G − t × Y, where Y is its earnings. Where earnings are above the break-even point of G ÷ t the amount turns negative, so the household pays tax.

Worked example 6 (invented). G = 6,000 and t = 40%, so break-even income = 6,000 ÷ 0.4 = 15,000.

Earnings	Payment (6,000 − 0.4 × earnings)	Net income
0	+6,000	6,000
5,000	+4,000	9,000
10,000	+2,000	12,000
15,000	0	15,000
20,000	−2,000	18,000

Each extra unit earned adds 60% to net income at every level, so there is no steep withdrawal and no cliff. For households earning 0, 5,000, 10,000, 20,000 and 40,000 the payments are +6,000, +4,000, +2,000, −2,000 and −10,000, a net cost of zero.

Evaluation. NIT gives a clear floor and keeps the incentive to work. But a higher G or lower t raises both the break-even point and the cost. With G = 6,000 and t = 30%, break-even is 20,000, so more households receive money. A high t cuts incentive, while a low G leaves the poor in poverty.

Universal and means-tested benefits

A universal benefit goes to everyone in a group, such as all families with children, whatever their income. A means-tested benefit goes only to those whose income or wealth falls below a set level.

Worked example 7 (invented). Country P has 100,000 families with children, and 20,000 of them are low-income.

• Universal: 1,200 each costs 120 million.
• Means-tested: 3,000 to the 20,000 costs 60 million, plus 8 million to administer, so 68 million.
• If only 75% claim, 15,000 families receive 45 million, and the cost is 53 million, with 5,000 eligible families missing out.
• With 120 million to spend, a targeted scheme could pay 120 million ÷ 20,000 = 6,000 per poor family.

	Universal	Means-tested
Targeting	Weak: much goes to those not in need	Strong: aimed at the poor
Cost	High	Lower for a given payment
Take-up	High	Lower, because of stigma and complexity
Poverty trap	Not created	Created or made worse
Political support	Strong	Weaker

Universal basic income

A universal basic income (UBI) is a regular payment to every individual, with no means test and no work condition.

Worked example 8 (invented). Country P has 2 million adults and pays each 5,000 a year.

• Gross cost = 2,000,000 × 5,000 = 10 billion.
• If 4 billion of existing benefits is scrapped, the net cost is 6 billion.
• With taxable income of 40 billion, a flat tax of 6 ÷ 40 = 15% covers it. Net gain for a person earning Y is 5,000 − 0.15Y, so the break-even income is 5,000 ÷ 0.15 = 33,333.

Someone now receiving a means-tested benefit of 9,000 would lose 4,000 on a UBI of 5,000, so the amount and what it replaces decide who gains.

Evaluation. It is simple, removes the poverty trap and has no stigma. But it is costly and needs higher taxes. Its effect on work is uncertain: the income effect may reduce hours, while the substitution effect favours work, compared with a benefit that is withdrawn as earnings rise.

Evaluating redistribution policies

Judge any policy on these points, then conclude:

• Effectiveness at reducing poverty and inequality.
• Effect on incentives to work, save and invest.
• Cost, funding and administration.
• Take-up, stigma and political support.
• Time: some effects are immediate, others take years.

Common errors

• Treating equity and equality as the same word.
• Claiming the poverty trap exists because benefits are “too high”. It arises from how fast they are withdrawn.
• Ignoring administration costs and take-up when comparing benefits.
• Listing policies without a judgement.

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.