2.1 Motivations and Objectives

We have argued in Chapter 1 that a more uniform distribution of income in a population makes individuals better off economically in respect of income. Since high income inequality is likely to generate financial hardship for the lower-income sections of the population and social discontentment and political instability, any society should reduce its high inequality to a reasonably low level.

For determining the level of equality we need a yardstick that summarizes the closeness of incomes of different individuals. Such an indicator gives us a concrete idea about the deviation of the actual distribution from the norm, the distribution of perfectly equal incomes. An adequate indicator of income equality should incorporate interpersonal comparisons so that a redistribution of income from a better-off individual to a worse-off individual, such that the donor does not become poorer than the recipient, generates a better state of incomes, as desired from a social welfare standpoint. Equivalently, we say that equality increases under a progressive transfer of income, a Robin Hood operation. In the literature this notion of value judgment is known as the Pigou–Dalton transfer principle. It represents the egalitarian ethic that higher equality of incomes among individuals is socially preferred. A second value judgment involved in equality evaluation is anonymity; any reordering of incomes does not change the degree of equality – reflecting irrelevance of all characteristics other than income.