Wage Gap

Studies suggest that the gap between the highest and the lowest earners is growing. Using the extracts and your economic knowledge, to what extent is this an example of market failure? and assess the costs and benefits of a widening gap between the highest and lowest earners. (25 Marks)

Over the previous decade, as shown by extract B, the share of income received by the richest 1% in Britain has increased dramatically, from around 10% in 1997 to near 20% in 2005. After that, the situation has only got worse. The bottom tenth of earners have seen there way increase by a minuscule 0.1% between 2010 and 2011, while the top 0.1 saw theirs increase at more than 18x faster, and the Office of National Statistics have revealed that workers in the jobs that pay the least, such as dinner ladies and waiters, have seen their pay fall drastically in real terms, increasing fears about a regular families’ ability to cope with the financial stress.

The graph on the right shows the spread of incomes in the UK, outlining the true income inequality that we face in today’s economy. This shows that the poorest tenth of the earners in the population makes 3000-4000 pounds in net income while the richest tenth make around 70,000 after tax. This graph itself doesn’t show the full extent of the difference between the richest of society and the rest. This is because those in the top 1% have incomes substantially higher than the rest of those in the top 10%, where in 2012, the top 1% had an average income of 259,917 pounds.

In Britain, this is major example of a market failure because in an economy, a persons ability to consume goods and services depends upon their overall level of income. This widening gap in the economy is an example of an unequal distribution of income and wealth and this will lead to an unsatisfactory allocation of resources. This means that the poorer part of the population do not have access to the same range of goods and services that the average and rich part of the population have access to. Also, high inequality between people, particularly economically, leads to alienation of the citizens and can encourage crime in those who have less income. This could not only have negative consequences on those who are taking part in the crimes but also other members of the community who could be put in danger due to this. Due to this income inequality, the market will not cater for the needs and wants of those who do not have the sufficient economic means to buy the goods or those who do not have the votes to have any impact on the market demand. This is because, is an economic system, the main thing that matter is effective demand(The demand for a good or service and the means to do so) for the goods and services and without that, the market will not recognise you.

Also,