Economic Inequality

The economic utility is a term used to describe the economic disparities among people. These disparities may exist in wealth or income. Let us learn in this tutorial more about the concept of economic inequality, its types, and causes.


All people in the world don’t have equal amounts of wealth and their incomes also vary widely. As a result, the gap between rich and poor widens. This leads to various forms of economic disparity in society. Knowing the reasons and finding solutions to economic inequality is that is why important.

What is Economic Inequality?

The economic utility is a term used to describe the economic disparities among people. These disparities may exist in wealth or income. The differences in people’s wealth and income are alarming and although they have improved, the disparity is still so large that some activists argue that there should be a global minimum pay for everyone.

Consider these data to have an idea of the disparity:

  • According to Forbes, there are 2755 billionaires in the world as of 2021 while more than 711 million people lived on $1.90 per day.

  • There were 269 billionaires and 1.9 billion extremely poor persons in the 1990s.

So, there can be an argument that the numbers show an improvement. But, this argument is falsified immediately by the fact that the global billionaires own an amount of $ 13.1 trillion cumulatively.

Types of Economic Inequality

There are two major types of economic inequality, namely income and wealth inequalities. Each has its own attributes and characteristics.

Income Inequality

Income inequality addresses how big the differences in terms of payments people get in the economy. Incomes include not only wages but also other incomes such as self-earned income and income from selling properties or from rent.

This type of inequality is also applicable to shares owned by individuals. Over the last few decades, income inequality has widened. Some people have earned more and more while another section of society has seen their incomes stagnating or rising at a considerably lower rate.

Wealth inequality

Wealth inequality refers to the fact that a small group of people owns most of the stuff in the world. This stuff may include everything, from lavish properties to pricey automobiles.

As mentioned above the gap between these rich and poor populations is alarming and it is so high that some people argue for government intervention in creating a balance between those who are extremely rich and those who are overwhelmingly poor. However, with the advent of the knowledge economy, this gap seems only to be rising despite efforts made by economists to bring a change in the situation.

Effects of Economic Inequality

  • Social cohesion: There is a proven link between social cohesion and inequality. It has been found through research that more equal societies increase social welfare, people get involved in community programs, and the overall homicide rates plummet. An opposite situation exists in less equal communities.

  • Health of the population: There is a very strong link between diseases and economic inequality. The poor people are not only vulnerable to diseases but they also fall into a gradient that pushes unhealthy behavior among them. The poor are found to suffer more from lifestyle diseases such as diabetes and some forms of cancer too.

  • Utility and distributive efficiency: It has been noted that the marginal utility of wealth for a poor person is more than that of a rich.

For example, an additional dollar present may mean buying more essential products while for the rich it may not provide much utility. Moreover. The widening gap between rich and poor in society also reduces distributive efficiency to a large extent.

  • Economic incentives: Some economists of the neoclassical school believe that inequality provides economic incentives.

    For example, inequality may increase competition and innovation in an economy. However, the Keynesians don’t support this theory.

  • Economic Growth: Different economists have different views on this aspect of inequality. According to Robert Barro, economic disparity instills growth in developed economies while it reduces growth in poor economies. There are disputes among economies about whether economic inequality is good for growth or growth is a factor that increases inequality.

Causes of Economic Inequality

There are multiple reasons that cause economic inequality. Some of these are the following:

  • Labor market: The labor market that runs on demand and supply can lead to economic inequality. The jobs that are in demand pay less. This happens because there are many willing and eligible candidates for the job but the options are limited. Such jobs may include customer service jobs and jobs such as dishwashing. Conversely, for a job where there are limited potential employees, the wages will be higher.

  • Education: Education is also a very influential contributing factor in determining the economic inequality among individuals. People who get opportunities for better education get better employment and wages while those who cannot get good education have to stay content with a lower wage.

  • Gender, race, and culture: Gender, race, and culture can also be causes of inequality among individuals. It has been observed that these factors either provide an opportunity or a lack of opportunity to certain genders, races, and cultures when it comes to incomes.

When the opportunity is positive, there are chances of better income, while when the opportunity is negative, for groups, such as ethnic minorities, the income opportunities are less for them.

  • Economic development patterns: According to Simon Kuznets, the development patterns of economies also play a role in economic inequality. When development is low, there is less inequality among the members of the economy.

    However, when the economies start to develop, it gets more capital and the owners of this capital increase inequality. However, with intervention, this inequality is removed and equality is established in the economy again.

  • Wealth Condensation: Wealth condensation refers to the process of concentration of newly created wealth being possessed by those who are already wealthy. As wealthy people get more wealth-earning opportunities before the less wealthy ones, the condensation effect is observed in society.


Although there is a dispute among economists regarding the utility of inequality, most believe that there should be more equality in modern societies. As mentioned above, the economic disparity may cause various ill effects which are undesirable.

However, there are some positive aspects of economic inequality too. It is the perspective that determines the prospect. Inequality can, however, lead to social disharmony if it goes out to the extreme.

So, there must be a balance in the economy between the wealth of the rich and the poor. Governments should check the economic disparity in order to bring the balance and save the poor people from extreme poverty by alleviating their income. It is, however, easier said than done. For example, looking after the welfare of huge populations in a country like India is a rigorous task.


1. What is a method the governments often use to reduce the burden of inequality?

Ans. Progressive taxation is used to reduce the burden of inequality among the rich and poor. In such a system, the rich are taxed more than the poor. Economic incentives and subsidies are also offered to the poor too.

3. The economic inequality is present mostly in which type of economy?

Ans. Economic inequality is mostly prevalent in the free-market economy where the wealth creators earn hugely while there are enough homeless who do not have shelter and access to free healthcare.

Updated on: 13-Oct-2022


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