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What causes inequality in income and wealth, and how can governments influence the distribution?

The distribution of income and wealth: the difference between income and wealth, the causes of inequality, the costs and benefits of inequality, and the policies governments use to redistribute.

An Eduqas A520 answer to the distribution of income and wealth, covering the distinction between income (a flow) and wealth (a stock), the causes of inequality, the costs and benefits of inequality, and the redistributive policies governments use including progressive taxation, benefits and the provision of public services.

Generated by Claude Opus 4.812 min answerUpdated 2026-06-02

Reviewed by: AI editorial process; not yet individually human-reviewed

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Quick answer

Income is a flow of money received over a period (wages, interest, rent, profit and benefits); wealth is a stock of assets owned at a point in time (property, shares, pensions and savings). Wealth is usually distributed more unequally than income, and the two interact (wealth generates income; income can be saved into wealth). Causes of inequality include differences in wages (skills, qualifications and marginal revenue product), unequal ownership of wealth and inheritance, unemployment, and differences in the tax and benefit system. Inequality has benefits (incentives to work, invest and take risks; rewards for enterprise) and costs (poverty, weaker social cohesion, and a possible loss of demand since the poor spend a larger share of income). Governments redistribute through progressive taxation, cash benefits and transfers, the minimum wage, and the free provision of public services such as health and education, but face an efficiency-equity trade-off.

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What this dot point is asking
Income and wealth
Causes of inequality
Costs and benefits of inequality
Redistributive policy
Examples in context
Try this

What this dot point is asking

Eduqas wants you to distinguish income from wealth, explain the causes of inequality, weigh the costs and benefits of inequality, and explain the policies governments use to redistribute. This builds on the microeconomic treatment of inequality as a market failure and connects it to fiscal policy and macroeconomic objectives.

Income and wealth

Wealth is typically distributed more unequally than income, because assets are concentrated among older and richer households and are passed on through inheritance, compounding over generations.

Causes of inequality

Costs and benefits of inequality

Some inequality is widely seen as beneficial: it provides incentives to work hard, gain skills, save, invest and take entrepreneurial risks, and it rewards effort and enterprise, which can raise efficiency and growth. But high inequality has costs: absolute and relative poverty, weaker social cohesion and higher crime, reduced social mobility, and a possible loss of aggregate demand because the poor have a higher marginal propensity to consume than the rich (so redistributing income toward them can raise spending). Judging the "right" level of inequality is a normative question about equity.

Redistributive policy

The key evaluation point is the efficiency-equity trade-off: high marginal tax rates and generous benefits can blunt the incentive to work, save and invest, may encourage avoidance, and risk government failure, so redistribution must be designed to reduce inequality without unduly harming incentives.

How a progressive tax reduces inequality

Step 1: state the pre-tax position

Two workers earn $\pounds 20{,}000$ and $\pounds 80{,}000$ . The ratio of their incomes is $\frac{80{,}000}{20{,}000} = 4$ to 1.

Step 2: apply a progressive tax

A progressive tax takes 10 per cent from the lower earner ( $\pounds 2{,}000$ ) and 30 per cent from the higher earner ( $\pounds 24{,}000$ ). Post-tax incomes are $\pounds 18{,}000$ and $\pounds 56{,}000$ .

Step 3: recalculate the ratio

The post-tax ratio is $\frac{56{,}000}{18{,}000} \approx 3.1$ to 1, down from 4 to 1.

Step 4: interpret

The progressive tax narrows the gap between rich and poor (the income ratio falls), reducing inequality, and the revenue can fund benefits and services that narrow it further. The evaluation is that the 30 per cent marginal rate may weaken the higher earner's incentive to work or invest, the efficiency-equity trade-off.

Examples in context

UK income tax and Universal Credit. The main engines of redistribution, turning a more unequal market distribution into a less unequal post-tax-and-benefit one.
The social wage. Free healthcare and education are worth proportionally more to poorer households, narrowing the effective income gap.
Inheritance and the wealth gap. Rising house prices and inherited assets have widened wealth inequality even where income inequality has been broadly stable.

Try this

Q1. Distinguish between income and wealth, with an example of each. [4 marks]

Cue. Income = a flow received over time (wages, dividends); wealth = a stock of assets owned (property, shares). One can generate the other.

Q2. Explain why redistributing income from the rich to the poor might raise aggregate demand. [4 marks]

Cue. The poor have a higher marginal propensity to consume than the rich, so transferring income to them raises total consumption and hence aggregate demand.

Exam-style practice questions

Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Eduqas Component 2 20204 marksA government introduces a tax that takes

\pounds 3{,}000

from someone earning

\pounds 20{,}000

and

\pounds 9{,}000

from someone earning

\pounds 50{,}000

. Calculate the average tax rate for each and state whether the tax is progressive, proportional or regressive.

Show worked answer →

A short calculate question. The average tax rate is tax paid divided by income.

Lower earner: $\frac{3{,}000}{20{,}000} \times 100 = 15\%$ . Higher earner: $\frac{9{,}000}{50{,}000} \times 100 = 18\%$ .

Because the average tax rate rises with income (15 per cent to 18 per cent), the tax is progressive, so it reduces income inequality. Markers reward both average rates and the correct classification (progressive because the average rate rises with income).

Eduqas Component 3 (macro) 202112 marksEvaluate the view that the government should aim to reduce inequality in the distribution of income.

Show worked answer →

A levels-of-response essay. Knowledge and application: distinguish income from wealth, explain the causes of inequality (differences in wages, ownership of assets, inheritance, unemployment), and the main redistributive tools (progressive taxes, benefits, the minimum wage, free public services).

Analysis: develop the case for reducing inequality (fairness, social cohesion, higher marginal utility of income for the poor, and the demand boost from redistributing to high-spending groups).

Evaluation: weigh the costs: high marginal taxes and generous benefits can blunt incentives to work, save and take risks (efficiency-equity trade-off), risk government failure, and some inequality rewards effort and enterprise. Conclude with a supported judgement, for example that reducing extreme inequality is desirable but redistribution must preserve incentives.

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Sources & how we know this

Eduqas A Level Economics Specification (A520) — Eduqas (2015)