Inequality — AP Microeconomics
1. Defining Economic Inequality ★☆☆☆☆ ⏱ 2 min
Inequality in AP Microeconomics refers to the unequal distribution of economic resources across households, most commonly measured as **income inequality** (annual flow of earnings from work and capital) or **wealth inequality** (stock of accumulated assets like property or stocks). This topic makes up 12-18% of the total AP Micro exam score, appearing in both multiple-choice and free-response sections.
2. The Lorenz Curve ★★☆☆☆ ⏱ 3 min
The Lorenz curve is the standard graphical tool used to visualize income inequality. It plots the cumulative percentage of households (ordered from lowest to highest income on the x-axis, 0% to 100%) against the cumulative percentage of total national income held by that share of households (y-axis, 0% to 100%).
The 45-degree line drawn from (0,0) to (100,100) is called the **line of perfect equality**. If income were perfectly equally distributed, 10% of households would hold 10% of total income, so the Lorenz curve would lie directly on this line. The further the Lorenz curve is below the 45-degree line, the more unequal the distribution of income.
Exam tip: Never order households from highest to lowest income before plotting. AP exam graders will immediately deduct points for a reversed Lorenz curve that lies above the 45-degree line, as this reflects a fundamental misunderstanding.
3. The Gini Coefficient ★★★☆☆ ⏱ 4 min
The Gini coefficient is a numerical summary statistic that quantifies the level of inequality from a Lorenz curve. It is defined as the ratio of the area between the line of perfect equality and the Lorenz curve (area A) to the total area under the line of perfect equality (A + B, where B is the area under the Lorenz curve).
G = \frac{A}{A+B}
Since the graph is a 1x1 unit square, the total area under the 45-degree line is 0.5, so we can simplify the formula to $G = 2A$. The Gini coefficient ranges from 0 (perfect equality) to 1 (perfect inequality): higher values always mean greater income inequality. For AP exams, you will usually use the trapezoid rule to calculate Gini for discrete distributions.
Exam tip: If asked to shade area A on an FRQ, always shade the gap between the 45-degree line and the Lorenz curve. A common mistake is shading the area under the Lorenz curve (area B), which will lose you the point.
4. Tax Classification and Redistributive Policy ★★☆☆☆ ⏱ 3 min
Governments use progressive taxation paired with transfer payments to reduce income inequality. Tax systems are classified by their **average tax rate (ATR)**, the share of total income paid in taxes:
- **Progressive**: ATR increases as income increases (higher income households pay a larger share of income in tax)
- **Proportional**: ATR is constant across all income levels (also called a flat tax)
- **Regressive**: ATR decreases as income increases (higher income households pay a smaller share of income in tax)
Only progressive taxation reduces income inequality when combined with transfer payments to low-income households (such as welfare, unemployment insurance, or refundable tax credits).
5. The Equity-Efficiency Tradeoff ★★★☆☆ ⏱ 2 min
The core concept for evaluating redistributive policy in AP Microeconomics is the **equity-efficiency tradeoff**: while redistribution increases equity (a more equal distribution of income), it can reduce economic efficiency by distorting incentives.
For example, high marginal tax rates on high earners can reduce the incentive to work or invest, leading to lower total output and deadweight loss. However, some redistributive policies can increase *both* equity and efficiency, such as public education that corrects credit market failures preventing low-income households from investing in human capital.
Exam tip: When asked to explain the equity-efficiency tradeoff, always explicitly mention both sides: higher equity from redistribution, and potential efficiency losses from distorted incentives. You will not get full credit for only discussing one side.
Common Pitfalls
Why: Students confuse total tax paid with average tax rate, which is the correct metric for classifying tax systems.
Why: Students mix up the definition of the Gini coefficient and the area A calculation.
Why: The terms are used interchangeably in casual discussion, but they have distinct definitions tested on the AP exam.
Why: Students overgeneralize the equity-efficiency tradeoff, ignoring market failures that redistribution can correct.
Why: Students skip the sorting step when working with unsorted data, leading to an incorrect curve.