Income Distribution in a Market Economy

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Each economic system has its own characteristics relative to the individual system’s philosophy. Where one may be completely regulated by a government and another completely unregulated, the effects of those ideas differ greatly from system to system. To determine how a particular factor, income distribution, is affected by a particular system, the market economy, it is necessary to define both terms and to discuss the theoretical affect the market economy has upon income distribution.

Income distribution refers to who gets how much of the monetary benefit of an economy. Gregory and Stuart define it more completely as the “manner in which income generated in an economy is divided among the participants (population)” (2004). Simply, it is how the pie is divided up.

A market economy can be just as simply described as a system driven by the idea that everything is worth what someone will pay for it. As Gregory and Stuart explain it, a market economy is one “in which fundamentals of supply and demand provide signals regarding resource utilization” (2004). In this theoretical system, there are no external controls, such as those by the Fed and employee rates: the market determines the value of everything.

It stands to reason, then, that in a market economy, income distribution is determined by the marketplace. Everyone receives a benefit proportionate to the value of his or her contribution to the economy, as defined by the marketplace itself. It may also be that values of the supply of certain individual contributions, and by extension income distribution for them, can change over time as those products or talents become more or less in demand.

This is not the same for all economies; each one differs greatly. It is only once the terms are defined that it becomes possible to describe how income is distributed in a market economy.

Reference

Gregory, P. R., & Stuart, R. C. (2004). Comparing economic systems in the twenty-first century (7th ed.). Boston: Houghton Mifflin.