Cambridge International AS and A Level Economics: Income and wealth inequality and redistribution (9708)

This guide covers section 3.3 (Addressing income and wealth inequality) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 3 is AS Level content. A Level candidates study it too, because the syllabus assumes AS knowledge for Papers 3 and 4. Every country, household 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. For the wider topic, see government microeconomic intervention. To find your weak spots first, try a free 10-minute diagnostic.

What this guide covers

Outcome	What you must be able to do
3.3.1	Distinguish income as a flow from wealth as a stock
3.3.2	Explain how inequality is measured, including the Gini coefficient (calculation not required)
3.3.3	Explain the economic reasons for inequality of income and wealth
3.3.4	Explain and evaluate the minimum wage, transfer payments, progressive income taxes, inheritance and capital taxes, and state provision of essential goods and services

3.3.1 Income is a flow, wealth is a stock

Income is a flow: the money coming in during a period, for example wages, rent, interest, dividends and benefits each month or year. Wealth is a stock: what a household owns on a given date, valued net of what it owes. Wealth takes the form of property, savings, shares and pensions.

The two are linked. Saving turns part of a flow into the stock. Owning wealth produces a flow back, such as rent or interest.

Worked example (Household 1, invented). It earns 2,400 a month. It owns a home worth 210,000, savings of 18,000 and a car worth 7,000. It owes 120,000 on a mortgage and 5,000 on a loan.

• Annual income (flow) = 2,400 × 12 = 28,800 per year.
• Assets = 210,000 + 18,000 + 7,000 = 235,000. Debts = 120,000 + 5,000 = 125,000.
• Net wealth (stock) = 235,000 − 125,000 = 110,000 at that date.

If the household spends 25,200 and saves 3,600, its wealth rises by about 3,600 over the year, before any change in asset prices. A household can be income-rich and wealth-poor (high salary, large debts), or the reverse. So income and wealth need separate measures and policies.

3.3.2 Measuring inequality: the Gini coefficient

To see a distribution, rank households from poorest to richest and divide them into five equal groups (quintiles). Then record each group’s share of total income.

Quintile	Country A share of income (%)	Country B share of income (%)
Poorest 20%	6	9
Second	11	13
Middle	16	17
Fourth	23	23
Richest 20%	44	38

In Country A the richest fifth gets 44 ÷ 6 = 7.3 times the poorest fifth’s share. In Country B the figure is 38 ÷ 9 = 4.2.

Now plot the cumulative share of income against the cumulative share of households. In Country A the points are (20%, 6%), (40%, 17%), (60%, 33%), (80%, 56%) and (100%, 100%). Perfect equality would be a straight line where the poorest 20% have 20% of income. The further the curve bows below that line, the greater the inequality.

The Gini coefficient summarises that gap as one number between 0 and 1. It is the area between the line of equality and the curve, as a fraction of the whole area under the line of equality.

• 0 means perfect equality. 1 means one household has everything.
• A higher value means greater inequality.
• For the data above the value would be about 0.35 for Country A and 0.27 for Country B.

The syllabus says calculation is not required, so expect to be given values and to interpret them. (Calculating the Gini coefficient and Lorenz curve analysis appear separately, in section 11.4.2.)

Using the Gini coefficient well.

• Compare like with like: income before or after tax and transfers, households or individuals, and the same year.
• Compare income and wealth. If Country A has an income Gini of about 0.35 and a wealth Gini of 0.70, wealth is far more unequally held. This is typical because wealth accumulates over a lifetime and across generations.
• Look at change. A fall from 0.35 to 0.30 after taxes and benefits shows redistribution at work.

Limitations. It is one number, so very different distributions can share a Gini. A country with a rich top 1% and a country with a squeezed middle class could match. It says nothing about absolute living standards: a low Gini can mean everyone is equally poor. Household size and life stage also distort it.

3.3.3 Economic reasons for inequality of income and wealth

Markets pay factors of production according to demand and supply. Differences arise because the factors differ in scarcity, productivity and ownership.

Worked example (invented labour markets). Wage w is per hour and L is thousand hours a week.

Occupation	Demand	Supply	Equilibrium
S (long training)	L = 600 − 10w	L = −300 + 20w	w = 30, L = 300
U (no training)	L = 900 − 40w	L = −100 + 60w	w = 10, L = 500

Setting demand equal to supply: for S, 900 = 30w, so w = 30. For U, 1,000 = 100w, so w = 10. The skilled wage is three times the unskilled wage. Supply of S is limited by years of training, while many people can supply U. If demand for S rises by 90 at every wage (L = 690 − 10w), then 990 = 30w, so w = 33 and L = 360. The wage rises 10% and employment 20%.

Reasons for income inequality:

• Skills and human capital. Education and training cost time and money, so scarce skills earn more.
• Demand and supply. Shifts in demand across occupations change relative pay.
• Compensating differences. Dangerous or unpleasant jobs may need higher pay to attract workers.
• Discrimination and barriers. Unequal access to education, networks or jobs lowers some groups’ earnings.
• Employment status. Unemployment, part-time work and age or life stage matter.
• Ownership of capital and land. Profit, rent, interest and dividends go to owners, not workers.
• Market power. Firms or professions with bargaining power can raise rewards.

Reasons for wealth inequality are stronger and cumulative:

• Saving needs spare income. Higher earners save more, so wealth is concentrated.
• Compounding. 100,000 earning 4% a year grows to 100,000 × 1.04²⁰ = 219,112 in 20 years. Assets of 400,000 earning 5% yield 20,000 a year without working.
• Inheritance and gifts pass wealth between generations.
• Rising asset prices favour those who already own property or shares.
• Debt can push poorer households’ wealth below zero.

3.3.4 Policies to redistribute income and wealth

Minimum wage

A legal wage floor above equilibrium raises pay for those who keep jobs.

Worked example (invented labour market for low-skill work). Demand L = 1,000 − 50w and supply L = −200 + 100w. Equilibrium: 1,200 = 150w, so w = 8 and L = 600. The wage bill is 8 × 600 = 4,800.

Set the minimum at 10. Demand = 1,000 − 500 = 500. Supply = −200 + 1,000 = 800. Employment falls by 100 and 300 workers are unemployed (excess supply of labour). The wage bill is 10 × 500 = 5,000.

Labour demand is inelastic here: %ΔL = −100 ÷ 600 = −16.7% and %Δw = 2 ÷ 8 = +25%, so elasticity = −0.67. When labour demand is inelastic, the pay of the workers still employed rises by more than the number of jobs lost, so the wage bill rises.

• For: raises earned income directly and is cheap for government.
• Against: jobs may be lost if demand is elastic, firms may cut hours or raise prices, young and low-skilled workers suffer most, and it does not help the unemployed or those outside the labour force. Many low-paid workers live in households that are not poor, so targeting is imperfect.

Transfer payments

These are payments with no good or service supplied in return, such as unemployment benefit, pensions and child benefit. They redistribute from taxpayers to recipients. Universal benefits go to everyone in a category. Means-tested benefits go only to those below an income or wealth level.

• For: targets poverty directly and is flexible.
• Against: costs taxpayers, may weaken the incentive to work or save if a benefit is withdrawn as earnings rise, means testing has administrative cost and some eligible people do not claim.

Progressive income taxes

A tax is progressive if the average rate rises with income, because the marginal rate (on the next unit earned) exceeds the average rate.

Worked example (invented system). Nothing is taxed up to 10,000. 20% applies from 10,000 to 30,000. 40% applies above 30,000.

Pre-tax income	Tax	Average rate	Post-tax income
8,000	0	0%	8,000
20,000	2,000	10%	18,000
50,000	4,000 + 8,000 = 12,000	24%	38,000
100,000	4,000 + 28,000 = 32,000	32%	68,000

The richest-to-poorest ratio falls from 100,000 ÷ 8,000 = 12.5 to 68,000 ÷ 8,000 = 8.5. The richest household’s share of income falls from 56.2% to 51.5% and the poorest rises from 4.5% to 6.1%. If a transfer of 3,000 funded by this tax goes to the poorest household, its post-tax income is 11,000 and the ratio falls to 68,000 ÷ 11,000 = 6.2.

• For: large revenue, and it reduces inequality in the Gini sense.
• Against: high marginal rates may reduce effort, saving or enterprise; people may avoid or evade tax or migrate; the effect depends on how much revenue is raised and how it is used.

Inheritance and capital taxes

Inheritance tax is charged on wealth passed at death or by gift. Capital gains tax is charged on profit when an asset is sold.

Worked example (invented). An estate of 450,000 has a tax-free threshold of 250,000 and a rate of 30% above it. Tax = (450,000 − 250,000) × 0.30 = 60,000, an effective rate of 13.3% of the estate. A share bought for 80,000 and sold for 140,000 gives a gain of 60,000. With an allowance of 10,000 and a 25% rate, tax = 50,000 × 0.25 = 12,500.

• For: targets wealth and unearned gain, reduces the concentration of wealth across generations, and it falls on transferred assets, not earnings, so work incentives may suffer less.
• Against: avoidance through gifts, trusts or moving assets abroad; may reduce saving; family businesses may have to sell assets; raises little revenue.

State provision of essential goods and services

Health care and education provided free, or at a subsidised price, give a benefit in kind. Because they are worth a similar amount to everyone, they matter more to low incomes.

Worked example (invented). Two households receive public services worth 5,000 each. For a household with income 10,000 that is 50% of income. For one with 90,000 it is 5.6%. Final incomes become 15,000 and 95,000, so the ratio falls from 9.0 to 6.3.

• For: improves access and equality of opportunity, and raises human capital, which helps long-run incomes.
• Against: high opportunity cost, funded by taxes, possible waste or low quality without price signals, and better-off families often use services most.

Evaluating policies together

Judge each policy on its effectiveness at reducing inequality, cost, effects on incentives, and time scale. Taxes and transfers redistribute after income is earned. The minimum wage changes pay before tax. State provision and wealth taxes act on opportunity and on the stock. Governments weigh fairness against possible losses of output and efficiency, so end with a judgement.

Common errors

• Mixing up income and wealth, or calling wealth a flow.
• Saying a higher Gini means more equality.
• Saying a minimum wage always causes unemployment. It depends on elasticity and the size of the rise.
• Confusing a high marginal rate with a progressive system.
• Listing pros and cons 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), section 3.3.