Question

Why do we want to reduce but not eliminate income inequality? What consequences would we face achieving perfect income equality?

Answer 1

Income inequality has a negative impact on the economy in the long run by hampering it's growth and reducing GDP. A lot of studies have shown that income inequality reduces the GDP but the impact on the GDP varies based on the country. It is seen that economies usually try to reduce the income inequality but not completely eliminate it. There are various reasons why we do not want to completely eliminate income inequality:

1. It will hamper the innovation in the society- Entrepreneurs will not have an incentive to invest and innovate because they will not be rewarded for their risks. Without income inequality they will not be rewarded for their incentives.

2.Many economists argue that income inequality is good up until a level becuade it encourages skill enhancing in the economy. People would enhance their skills to compete for a few top jobs available.