Chapter 2: Inequality
Market economies give rise to a great variety of economic positions with diﬀerences in wealth, income and consumption. Such diﬀerences are commonly called ‘inequality’. This chapter attempts to bring some of the controversies surrounding inequality into perspective by emphasizing three aspects. First, inequality reﬂects diﬀerences in choice as well as in opportunities. It is rarely the case that an individual has to have a particular wealth, income or consumption. Second, choices and opportunities are interrelated over an individual’s life cycle. Present opportunities are to some extent the result of choices made earlier in life, and choices today shape opportunities in the future. Third, there is an element of chance. The wealth, income or consumption an individual is observed to have may be diﬀerent from what he or she was planning to have. Three sets of choices are crucial in determining an individual’s economic position. Over and over again the individual must decide what the portfolio of assets should look like, how time should be divided between diﬀerent uses and what to consume. The ﬁrst two choices determine the individual’s (expected) income from capital and labour, respectively. Consumption choices are not only important for the individual’s immediate well being, but also have an eﬀect on the individual’s wealth and future productivity. All of these choices play an important role in shaping his or her economic position over the life cycle. STATISTICAL ASPECTS Inequality in income, wealth and consumption has received much attention during the...
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