percentage of those with high levels of wealth.

The Tradeoff between Incentives and Income Equality

Government policies to reduce poverty or to encourage economic equality, if carried to extremes, can injure

incentives for economic output. The poverty trap, for example, defines a situation where guaranteeing a

certain level of income can eliminate or reduce the incentive to work. An extremely high degree of
redistribution, with very high taxes on the rich, would be likely to discourage work and entrepreneurship.

Thus, it is common to draw the tradeoff between economic output and equality, as Figure 15.10 (a) shows. In

this formulation, if society wishes a high level of economic output, like point A, it must also accept a high

degree of inequality. Conversely, if society wants a high level of equality, like point B, it must accept a lower

level of economic output because of reduced incentives for production.
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