Cambridge International as and a level Economics Ebook

Regulation and equity: 
Privatisation allows firms a 
greater freedom to operate in the market; government 
regulation is invariably necessary to ensure that 
consumers are not exploited and that social equity is not 
compromised.
KEY CONCEPT LINK
Equity and policies towards 
income and wealth 
redistribution
Introduction: equity versus eff iciency
Effi
ciency is a term that we have used widely so far in 
many of our discussions of microeconomics and refers to 
how limited resources can be used in the best possible way. 
Equity
is diff erent in so far as it refers to a distribution 
Wealth: 
an accumulated stock of assets.
KEY TERM
199
Chapter 8: Government microeconomic intervention

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of the other factors of production. Wealth is the term used 
for the accumulation of a 
stock
of assets such as property, 
shares, bonds or bank accounts. Th
ese assets are there to 
provide an income stream for the future.
Measuring inequality
A 
Lorenz curve 
is a simple, well-used way of representing 
inequality in an economy.
 Figure 8.9 
is a typical example. 
If there was a completely equitable distribution of income, 
then this would be represented by the 45
o
line on this 
diagram. Th
e extent of inequality is shown by area A. 
As inequality rises, this area increases, moving towards 
the bottom right of the diagram. When area A shrinks, 
the distribution of income among the population becomes 
more equal.
Th
e 
Gini coeffi
cient 
is a numerical measure of the 
extent of inequality. On 
Figure 8.9 
it is calculated as 
(area A) ÷ (area A + area B). If the income distribution is 
equal, this coeffi
cient will have a value of 0. At the other 
extreme, if all income accrues to just one person, then 
the Gini coeffi
cient is 1. Both extremes do not occur in 
reality – the norm is for coeffi
cients to be somewhere 
between these two values. A Gini coeffi
cient of 0.3 
therefore indicates a more equal distribution of income 
than say a coeffi
cient of 0.5. Th
e smaller coeffi
cient would 
be indicated by a slimmer segment on the Lorenz curve. 
Table 8.1
contains some typical examples.