Unit 5b

Externality & Equity

1. Market Failure

1. Market Equilibrium may not be efficient

In the last chapter, we learnt that government intervention will lead to inefficiency. However, sometimes the market
itself can fail and government intervention may be necessary. It can be due to externality and existence of public
goods.

2. Condition for Efficiency :

Earlier, we learnt that condition for efficiency is

However, with externality, we must consider the costs and benefits from the social viewpoint,

2. Externality

When a person engages in an activity that affects the well-being of an external party but neither pays nor receives any
compensation for that effect, an externality arises. arises. If this happens, market equilibrium may fail to maximise the
total social surplus of society. The allocation of resources may not be efficient.

Positive Externality

When a person’s action generates _____________________________________ to _________________________________________

but the person does not receive any ______________________________________________________________________.

Example

Negative Externality

When a person’s action imposes _____________________________or ________________________________________________ on

other parties, but the person does not give any compensation.

Example

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 Unit 5b
3. Negative Externality and Positive Externality

3.1 Negative Externality

When an economic agent’s action imposes a cost on others and the agent does not compensate them, there is a
divergence between private and social costs.

Marginal __________________________Cost = Marginal _________________________Cost + Marginal _________________________Cost

MPC - the cost borne by the person who takes the action.
MEC - the cost borne by affected parties who do not receive any compensation.
MSC - the cost borne by society as a whole , = sum of private cost and external cost.

With negative externality,

There is a __________________________________________________between marginal social cost and marginal private cost,

where __________________________________________________

Example : .Smoking

Private Cost

External Cost

----------------------------------------------------------------------------------------------------------------------------------------------------------

3.2 Positive Externality

When an economic agent’s action benefits other parties without the agent receiving payment from them, there is a
divergence between private and social benefits/

Marginal Social _______________________= Marginal Private_________________ + Marginal External ______________________________

With positive externality,

There is a __________________________________________________between marginal social benefit and marginal private benefit,

where __________________________________________________
Private benefit - benefit gained by the person who takes the action.
External benefit - benefit gained by affected parties who do not pay for it.
Social benefit - benefit received by society as a whole = sum of private benefit and external benefit.

Example : Tertiary Education

Private Benefits

External Benefits

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 Unit 5b

Test yourself

2022#22 (87%)
Which of the following will most likely be the positive external effect of the opening of the full Tuen Ma Line of MTR?
A. The travel time is shortened for MTR passengers
B. The business of restaurants near the stations of MTR Tuen Ma Line rises
C. The problem of noise pollution worsens
D. The income of minibus drivers drops

2014#18 (93%)
Korean pop singers are becoming more popular in Hong Kong. To these singers, which of the following are their private
benefits?
(1) the rise in royalties from the sales of their albums
(2) the rise in sales revenue of Korean-designed fashion
(3) the rise in the number of visiting Korea
(4) the rise in revenue shared from their concerts held in Hong Kong

A. (1) and (3) only B. (1) and (4) only C. (2) and (3) only D. (2) and (4) only

2015#17(45%)
Which of the following is an example of the divergence between private and social benefits?
A. A security guard watches live concerts when he is working in a concert hall
B. A tourist enjoys the music performed on the street and he does not pay for that
C. A resident living next to a karaoke lounge cannot fall asleep because of the noise
D. After the removal of the airport, the market value of the residential flats in the region increases

2014#19 (81%)
Which of the following are ways to lessen the problem of divergence between private and social costs in Hong Kong?
(1) to collect a sewage charge
(2) to collect a university tuition fee
(3) to collect a charge on electricity
(4) to collect a levy on plastic bags

A. (1) and (3) only B. (1) and (4) only C. (2) and (3) only D. (2) and (4) only

SP#18
In which of the following situations will there be NO divergence between private and social costs / benefits?
A. A chemical factory upstream pollutes a river without considering the damage inflicted upon fish farmers
downstream.
B. A diner smokes in a restaurant without considering the effects on people nearby.
C. A farmer raises some sheep which damage the crops of nearby farmland owned by the farmer.
D. A pianist plays the piano at home and receives no payment from his neighbour who enjoys the music.

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 Unit 5b

DSE Question Type : Involve externality ?

1. How does the decision maker affect others?
2. ________does not compensate ________ or receiving compensation from ________
3. positive / negative externality + MSB > MPB or MSC > MPC
4. external benefit / cost involved

E.g. A shop sells stinky tofu near a residential area. The shop gives off an unpleasant smell. Explain how a divergence
between private and social costs may be involved.

2022#10a
The Olympic Games attract billions of international television viewers to watch the competitions among thousands of
top athletes. Some restaurants in shopping malls find their businesses increase sharply when the mall broadcast
Olympic events. Explain how the broadcast of Olympic events may result in a divergence between private and social
benefits. (3 marks)

2016#4
These years many customers like to take photos of the food they have in restaurants and share them on social media.
However, some high-end restaurants do not allow their customers to take photos. Explain how the “photo-taking-and
sharing” behaviour of the customers may involve externality. (3 marks)

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 Unit 5b
4. Inefficiency Caused by Externality

Market Equilibrium:

Efficient Output =

Negative externality Positive externality

When there is negative externality / divergence between social cost and private cost,

When there is positive externality / divergence between social benefit and private benefit

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 Unit 5b

DSE Question Type : In terms of externality, explain how xxxx may result in inefficiency?
1. How does the decision maker affect others? ___does not compensate _____ or receiving compensation from ___
2. positive / negative externality + MSB > MPB or MSC > MPC
3. external benefit / cost involved
4. MSB > MSC or MSB < MSC → Deadweight Loss
5. number of ______ higher or lower than efficient level

2017#4a
Pokemon Go is a popular game for which gamers need to move around different places with their smartphones to catch
the cyber-pets. Its developer has placed hotspots in different areas where many gamers are attracted to gather. Some
restaurants in remote areas found their business sharply increased as they are located near these hotspots. Based on
the above information, explain, in terms of externality, how the placing of the hotspots may result in inefficiency.
(3 marks)

2015#12d
Some residents complained that the large number of tourists overloaded the public transportation system, resulting in a
large increase in travel time for all passengers. Explain, in terms of externality, why inefficiency may exist when the
transportation system is overcrowded. (4 marks)

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 Unit 5b
5. Solutions to Externality

Externalities may cause inefficiency. There are two major types of solution to the problem of externalities:

- __________________________________________________

- __________________________________________________

5.1 Government Solution

a. Taxation, charges or penalties

E.g. tobacco duty, plastic bag levy and fixed penalty on littering

Negative externality exists

b. Subsidizing production→ lower MPC → increase production

E.g. subsidies provided to education and medical services, research grants and Innovation and Technology Fund.

Positive externality exists

c. Restriction or removal by regulation

The government can
• set a maximum allowable level of harm for firms to reduce the divergence between MPC & MSC
• restrict the output of the firms that generate negative externalities so that their output is reduced to the socially
optimal level
• ban the production or consumption of goods that generate negative externalities under certain circumstances
• require people to consume or produce a certain amount of goods that generate positive externalities.

d. Public ownership
The government may also own or take over the firm that generates external costs or provides external benefits. If a
firm that generates external cost or benefits is owned by the government, the firm may take external costs into
consideration and produce according to social costs and social benefits.

5.2 Market solution

a. Market exchange
• Private property rights are well-defined
• transaction cost is negligible or zero
the person with the right will receive compensation; the person without will pay

b. internalization / self-restraint
Firms or people involved in harmful externalities find their own ways to reduce or remove the externalities

c. integration
The externality problem is solved by combining separate firms under the same ownership.

d. doing nothing
If the cost involved in corrective government or market measures > deadweight loss, then doing nothing may be the
best choice.

** Solving inefficiency =/= eliminate all or cut production to zero

**Just put it back to right level where MSB = MSC
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 Unit 5b

DSE Question Type : Explain how xxxx may IMPROVE economic efficiency?
6. How does the decision maker affect others? ___does not compensate _____ or receiving compensation from ___
7. positive / negative externality + MSB > MPB or MSC > MPC
8. external benefit / cost involved
9. MSB > MSC or MSB < MSC → Deadweight Loss
10. number of ______ higher or lower than efficient level
11. provide subsidy → lower MPC → increase quantity towards efficient level or
provide tax → higher MPC → lower the quantity towards efficient level
12. narrow gap between MSB and MSC

2017#4
Pokemon Go is a popular game for which gamers need to move around different places with their smartphones to catch
the cyber-pets. Its developer has placed hotspots in different areas where many gamers are attracted to gather. Some
restaurants in remote areas found their business sharply increased as they are located near these hotspots. How may
such a problem of inefficiency be relieved by market? (2 marks)

2021#10d
Mask have become a daily necessity as it is compulsory for people to wear masks in many public areas. To stabilise the
supply of surgical masks in Hong Kong, the Government has launched the ‘Local Mask Production Subsidy Scheme’,
which provides subsidy to local mask producers. Wearing surgical mask can reduce the chance of contracting diseases
for an individual and can prevent spreading diseases to others as well. In terms of externality, explain how the subsidy
could improve economic efficiency. (4 marks)

2019#4
Getting vaccinated is an effective way to prevent infection and protect oneself from flu viruses. Using the concept of
externality, explain why the government provision of subsidy on Seasonal Influenza Vaccination (接種季節性流感疫苗)
may improve economic efficiency (4 marks)

- Getting vaccinated protects oneself as well as lowering the chance of others being infected by flu while it is not
compensated by others.
- Thus there is external benefit.
- The number of people getting vaccinated is below the efficient level.
- Subsidy can increase the quantity towards the efficient level and thus narrow the gap of marginal social benefit
and marginal social cost.

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 Unit 5b
Enrichment

Carbon pricing
To solve the problem of global climate change caused by carbon dioxide emission, two major types of carbon pricing has
been proposed.

1. Carbon Tax
The government directly imposes a tax on carbon emissions. A carbon tax can be regarded as a government solution to
negative externalities.

2. Emission trading systems (ETS)

The government sets a limit on total carbon emissions. Within this limit, polluting companies need to buy emission permits
from the market. ETS can be regarded as a market solution to negative externalities.

The basic idea of carbon pricing is charging those who emit carbon dioxide for their emissions. Both of the measures
would raise polluters’ private cost of production and discourage them from polluting. As a result, the global emission
would be reduced.

The most common market solution is market exchange, i.e. negotiation and compensation between parties causing the
external effects and the affected parties.

--------------------------------------------------------------------------------------------------------

Nobita (大雄) and Shizuka (靜香)are good friends.

Nobita hates durian but Shizuka likes it a lot.

One day, Shizuka bought a durian and wanted to find a place

to eat her durian with Nobita.

a. Explain why her act may be inefficient from a social viewpoint.

b. How would market exchange emerge to solve the externality problem?

If Shizuka is eating at Home

The right to eat durian belongs to Shizuka.
Nobita can pay Shizuka to reduce her consumption of durian. This
increase the marginal private cost (MPC) of Shizuka because she
has to forgo the payment from Nobita if she does not eat less
durian.
Thus, the equilibrium output will decrease.
Eventually Shizuka will eat at a level where MSB = MSC.

If Shizuka is eating at Nobita’s Home

The right to eat durian belongs to Nobita.
Shizuka can pay Nobita to buy the right in order to eat durian. This
increases the marginal private cost (MPC) of Shizuka because she
has to pay extra if she does not eat less durian.
Thus, equilibrium output will decrease.
Eventually Shizuka will eat at a level where MSB = MSC.

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 Unit 5b
6. Efficiency & Equity

Efficiency Equity
• Efficiency is related to the maximization of total • Equity is related to equality of income distribution.
social surplus.
• Efficiency is a positive concept. • Equity is a normative concept.
It can be tested against objective facts with no value It involves value judgements. People may have
judgement. People can evaluate efficiency by different standards of fairness of income distribution.
measuring the total social surplus.

A trade-off may exist between efficiency and equity. Larger outcome may be achieved at the expense of less even
income distribution and vice versa.

7. Measuring Income Distribution

7.1 Income distribution table by income group

We can divide all households into different income groups, e.g. high, middle and low income groups. By calculating the
proportion (in % ) of each income group, we can obtain a rough picture of income distribution in an economy.

7.2 Income distribution table by decile groups

The below shows the percentage distribution of the monthly household income in Hong Kong by decile groups.
Decile Share of monthly household income (%)
Groups 2006 2016
1st (lowest) 0.8 0.6
2nd 2.1 1.9
3rd 3.2 3.0
4th 4.3 4.2
5th 5.6 5.5
6th 7.0 7.1
7th 8.8 9.0
8th 11.3 11.6
9th 15.6 16.1
10th(highest) 41.4 41.0
All groups 100 100

a. Based on the table above, can we conclude that the first here decile groups earned less income in 2016 compared
with 2006?

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 Unit 5b

7.3 Lorenz Curve

A Lorenz curve shows the cumulative percentages of household income against the cumulative percentage of
households, start from households with the lowest income.

Interpretation:
The bottom 20% of household earns about _______________ the total income of the economy.

The top 20% of household earns about ______________of the total income of the economy

Perfect / Absolute income equality Perfect / Absolute income inequality

All households have the same amount of income. Lorenz

curve is a 45-degree straight line from origin. Only one household earns an income and all other
households earn nothing

E.g.

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 Unit 5b

7.4 Gini Coefficient

The Gini coefficient is the ratio between the area the 45- 100
degree line and the Lorenz curve to the area below the 45-
degree line.

Cumulative percentage of income

45-degree line
=
Lorenz curve

0 100
Cumulative percentage of households

Gini coefficient = 0 0 <Gini Coefficient < 1 Gini coefficient = 1

When every household in an When a Gini coefficient falls between When all the income of an economy
economy earns the same amount of zero and one, the Lorenz curve lies is in the hands of one household and
income, the Lorenz curve will between the line of perfect income other people earn nothing, the
coincide with the line of perfect equality and the line of perfect Lorenz curve will coincide with the
income equality. income inequality. line of perfect income inequality.

Test yourself
The Gini coefficient of an economy increases. Can we draw the following conclusions?
a. The income gap between the rich and poor widens
b. The living standard of the low-income group decreases
c. The high-income group earns more while the low-income group earns less
d. The income of the rich increases
e. It is possible for all households to enjoy a higher income.

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 Unit 5b
Test yourself
19. Study the following Lorenz curves of two economies.
SP#19 Study the following Lorenz curves of two economies.

% of % of
income income

% of households % of households
Lorenz curve of Country A Lorenz curve of Country B

From the above diagrams, we can conclude that

A. the income
Fromdistribution of Country
the above diagrams, A isconclude
we can more even
that than that of Country B.
B. the income distribution of Country B is more even than that of Country A.
C. the high-incomeA.group
thein
income distribution
Country A earns of Countryincome
a higher A is more even
than than
that in that of Country
Country B. B.
B. the income distribution of Country B is more even than that
D. the high-income group in Country B earns a higher income than that in Country A. A.of Country
C. the high-income group in Country A earns a higher income than that in Country B.
D. the high-income group in Country B earns a higher income than that in Country A.
PP#18 The following table shows the Gini coefficient of Economy A from Year 1 to Year 4.

Based on the above information, which of the following statements is/are correct?
(1) The income of high-income households increases while the income of low-income households decreases.
(2) The income distribution becomes more uneven.
(3) The general living standard declines.
40
A. (1)HKDSE-ECON
only 1−7 (Sample Paper)
B. (2) only
C. (3) only D. (1), (2) and (3)

2012#20 (82%)The following diagram shows the Lorenz curves of Country A and Country B:

According to the above two diagrams,

A. Country B has a higher national income than Country A
B. The low income group of Country B has a higher income than that of Country A
C. Country A has a more even distribution of income than Country B
D. Country A has a larger Gini coefficient than Country B

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 Unit 5b
8. Sources of Income Inequality

8.1 Income inequality can occur among different groups.

a. Labour quality differences

• E.g. intelligence, height, attitudes, appearance
• Physical condition as research shows that the average income may be higher for people who are fitter, taller
or with better appearance since some jobs require certain physical attributes to be more productive (e.g.
sportsmen, models).

b. Differences in human capital

Human capital  → Productivity of labour  → Income 
E.g., knowledge and skills

c. Age and Sex Differences

E.g. older → gain experience → higher income / older → less productive → lower income
E.g. median monthly earning of male > that of female

d. Discrimination in the labour market

• Racial discrimination in job market and e some ethnic groups may suffer a lower wage rate for the same job.
• Gender as sex discrimination may be found in working places. In general, female suffers a lower wage rate on
average for the same rank.

e. Unequal ownership of land, capital and business

Wages are not the only source of income. Households may earn income by owning capital, such as stock and
property.

f. Differences in entry requirements

g. Technological advancement

8.2 Income inequality within the same group vary across industries

a. Human capital of labour required

Entry to a particular occupation is closely associated with a person’s human capital and capital endowment .
Occupations requiring low-skilled workers tend to have lower income inequality because human capital of labour
required is more or less homogeneous. E.g. income inequality among lawyers is greater than that among security
guards because knowledge and skills required for the legal profession are more diverse than for security guards

b. Payment methods
Workers who are paid by time rates tend to have less income inequality. Those who receive commission and
performance-based bonuses in addition to basic salaries tend to have greater inequality.

c. Age
Young workers tend to have less income inequality than experienced workers. This is because the work experience that
young workers possess does not vary widely.

d. Education Level
Workers with low education level tend to have less income inequality than well-educated workers. This is because
people with low education levels tend to take low-skilled jobs which require homogeneous human capital. Jobs taken by
better-educated workers have more diverse requirements in terms of their human capital. Hence, their incomes vary
more widely.

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 Unit 5b
Test yourself

2018#4 Apart from the difference in education level, explain TWO factors that may lead to income inequality (4 marks)
• Race as there may be racial discrimination in the job market and some ethnic groups may suffer a lower wage rate
for the same job.
• Gender as sex discrimination may be found in working places. In general, female suffers a lower wage rate on
average for the same rank.
• Physical condition as research shows that the average income may be higher for people who are fitter, taller or with
better appearance since some jobs require certain physical attributes to be more productive (e.g. sportsmen, models).
2020#23 (48%)
The following table shows the data of average income earned by women and men according to their age in 2018
Age Average annual income of women (HK$) Average annual income of men (HK$)
20-29 122 000 121 000
50-59 482 000 645 000

Which of the following may explain the phenomenon shown by the above data?
(1) Women tend to leave the job market earlier than men for taking care of the family, leading to a fewer women to
take up senior positions in companies
(2) Sex discrimination in labour market exists in the older generations
(3) Accumulation of human capital contributes to the difference in income between different age groups.

A. (1) only B. (2) only C. (3) only D. (1) , (2) and (3)

2013#7Table 1 shows the Gini coefficients by occupation of Hong Kong in the years 2006 and 2011.
Gini Coefficient
2006 2011
Construction 0.362 0.385
Financing, insurance, real estate and 0.544 0.548
business services

Table 2 shows the employment distribution by industry section of Hong Kong in the years 2006 and 2011.
Gini Coefficient
2006 2011
Construction 8.0% 7.7%
Financing, insurance, real estate and 17.0% 19.2%
business services

Table 3 shows the Gini coefficients of Hong Kong in the years 2006 and 2011.
2006 2011
Gini Coefficient 0.533 0.537

a. According to Table 1, which occupation has a smaller income inequality among its workers? Give TWO possible
reasons that account for such a difference in income inequality. (4 marks)

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 Unit 5b
9. Limitations of Income Inequality Measurement

Sometimes, income inequality measurements may not accurately reflect income inequality.

a. Different age structures

The Gini coefficient ignores changes in income over a person’s lifespan. Young workers may earn lower incomes, but as they
gain experience and acquire more skills, their incomes will in general increase over time. Therefore, increases in the
proportions of young and old members of an economy will generally increase the Gini coefficient, making the income
distribution appear more uneven. The problem of income inequality may be exaggerated.

b. Impact of taxes and transfers

Government measures to redistribute income, such as the imposition of taxes and the provision of social welfare, education,
housing and health care, will lower income inequality, but income inequality measurements may not fully reflect their
effects. The Gini coefficient is usually lower after deducting taxes and adding transfers

c. Different household sizes

The Gini coefficient and many other measurements of income inequality are based on household income. They do not reflect
the income inequality of individuals.

Household income usually increases with household size because there tend to be more workers in a larger household. With
the same individual income, a smaller household will have a lower household income. If the variation in household sizes is
great, measurements based on household income may indicate high income inequality even if individual income inequality
is low.

d. Different definitions of income

There are different definitions of income. In addition to income from full-time employment, there are other income sources
like part-time jobs, rent, interest and dividends. If some sources of income are excluded in the measurements, the accuracy
of income inequality measurement will be affected.

Practice

1. The Gini coefficient based on household income before tax is usually

A. greater than that based on post-tax income because government taxes tend to narrow the income gap.
B. greater than that based on post-tax income because income before tax is higher.
C. equal to that based on post-tax income because income tax is proportional.
D. equal to that based on post-tax income because the Gini coefficient has nothing to do with tax.

2. Which of the following is NOT a reason we should be careful in using the Gini coefficient to compare income
inequality among different economies?

A. Different economies may use different types of income data.

B. Population and family structures may be different among different economies.
C. Some economies may use individual income rather than household income as income statistics.
D. Living standards may be different among different economies.

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 Unit 5b
10. Equalizing Income and Opportunities

Government policies to reduce income inequality can be divided into two categories.

1. Equalising Income or Outcome

Policies that aimed at equalizing income refer to measure that directly __________________________________________________

______________________________________or the _________________________________________________________________________between the

_________________________________________________________.

• Offer cash gift $5000 to DSE students in Yuen Long (2019#2b)

• Increasing standard tax rate for rich (2017#13bii)

2. Equalising Opportunity

Policies that aimed at equalizing opportunities refer to measures that provide equal opportunities in society so that

low-income groups can _________________________________________________________________________________________________________ .

• Offer cash gift $5000 to DSE students in Yuen Long

• Low priced medical services, transport subsidy
• subsidy for local private education institutions undergraduate program

E.g. Education

Test yourself

Equalising income / outcome Equalising opportunity

Comprehensive Social Security Assistance (綜

合社會保障援助計劃)

Enacting law prohibiting racial discrimination

Fee remission (學費減免) granted to students

from low-income families

Public housing provided for low-income

households

Affordable public health services

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 Unit 5b

Question Type: How does it affect equity [also commonly asked in essays]

1. Equalize income /outcome

• how does it affect the low income group
• how does it affect the high income group
• Narrow/ widen income gap [even when they are not affected, please also state that they are not affected]

• Equal amount of increase in income results in

o a higher % increase income for the poor and a lower % increase in income for the rich
o equalize income

2. Equalize opportunity
• enhance the chance of the poor to _______ without being hindered by their backgrounds (2019#2b, 2015#8, 2016#11c)
• improve productivity (2015#8)
• improves future income (2017#11c, PP#11d) / earning power in the future (2015#8)
• reduce income inequality over generations (2017#11c)

2019#2b
Li Ka Shing Foundation offered an unconditional cash gift of $5000 to each 2018 HKDSE candidate in Yuen Long, Tuen
Mun and Island districts under the project “Decide Well, Spend Wisely”.

Statement A: The project can improve the public examination results of candidates in those districts
Statement B: The project can improve equity in Hong Kong.

Justify Statement B. (4 marks)

2021#10a
Mask have become a daily necessity as it is compulsory for people to wear masks in many public areas. ‘Compulsory
mask wearing creates a larger burden to the low-income group than the high-income group.’ Justify the statement. (2
marks)

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 Unit 5b

2017#11c
The government of Country X introduces a per-unit subsidy to the education services of private universities. “The
subsidy causes inefficiency even though both students and universities benefit.” Explain whether subsidizing education
can help improve equality (3 marks)

2016#11cd Source B: an extract from the Hospital Authority webpage

The Hospital Authority is committed to providing community-based primary care services. Our target patients
included the elderly, low-income individuals, and patients with chronic diseases.

c. With reference to Source B, explain how the services provided by the Hospital Authority can enhance equity. (2
marks)
d. Many people argue that public clinics should raise the fee to reduce the waiting time. Evaluate this argument in
terms of equity and economic efficiency (4 marks)
•

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 Unit 5b

11. Policy Concerns

Government policies that aim at equalising income might affect efficiency. On the other hand, policies that aim at
improving efficiency might affect income distribution **There is often a trade-off between efficiency and equity.**

13.1. Giving up efficiency in exchange for equity

To achieve equality, government may adopt policies that redistribute income from rich to poor.
E.g. increase tax for high income , provide benefits to low income

13.2 Giving up equity in exchange for efficiency

If the government tries to achieve efficiency, it may adopt policies that encourage competition in the market. This may
worsen income inequality because the market reward people according to their productivity.
E.g. abolish minimum wage law

----------------------------------------------------------------------------------------------------------------------------------------------------
2023#12d Source E (amended)
A US producer We can no longer bear the costs of tariffs on raw materials imported from China without
increasing our product prices.
An economist The tariffs cause the prices of imported consumer goods from China to rise. This puts a greater
burden on low-income households than on high-income households.

Two strategies have been suggested to address the problem of inflation in the US.
Strategy 1 Raising the salaries tax rate for the high-income group
Strategy 2 Cancelling the tariffs on Chinese imports

With reference to source E and your own knowledge in Economics, discuss the effects of EACH strategy on the US
economy in terms of equity.

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Unit 5b

21