Wednesday  November 25, 2020
 AmosWEB means Economics with a Touch of Whimsy!
 RISK POOLING: Combining the uncertainty of individuals into a calculable risk for large groups. For example, you may or may not contract the flu this year. However, if you're thrown in with 99,999 other people, then health-care types who spend their lives measuring the odds of an illness, can predict that 1 percent of the group, or 1,000 people, will get the flu. The uncertainty is that they probably don't know which 1,000 people, they only know the number afflicted. This little bit of information is what makes risk pooling possible. If the cost is \$50 per illness, then an insurance company can insure your 100,000-member group against flu if they collect \$50,000 (\$50 x 1,000 sick people), or 50 cents per person. By agreeing to pay the cost of each sick person in exchange for the 50 cent payments, the insurance company has effectively pooled the risk of the group.

DISTRIBUTION STANDARDS:

Alternative criteria for distributing the income generated from the production of goods and services to members of society. These criteria determine how total income is divided up across the economy, effectively answering the For Whom? question of allocation. The three most important distribution criteria are contributive standard, equality standard, and needs standard.
Income is generated through the production of goods and services, and only through production. The total amount of income generated each year depends on the total value of goods and services produced with the economy's limited resources. This income, once generated, is then distributed to members of society. The contributive, equality, needs standards are the three primary criteria for distributing available income.

### My Three Standards

Let's take a closer look at these three income distribution standards.
• Contributive Standard: The contributive standard distributes income based on a person's contribution to production. Those who produce more valuable goods receive more income. Suppose, for example, that Alicia Hyfield, a fast food employee, contributes \$5 worth of taco production each hour to Waldo's TexMex Taco World. In contrast, Harold "Hair Doo" Dueterman, a professional baseball player, contributes \$10 million worth of entertainment production each year for the Shady Valley Primadonnas baseball team. The contributive standard means each receives income equal to their contribution to production. Alicia receives \$5 per hour and Hair Doo receives \$10 million per year.

• Equality Standard: The equality standard distributes income equally to every person in society. Everyone--every man, woman, and child--receives exactly the same income--no more, no less. Suppose, for example, that a hypothetical nation like Northwest Queoldiolia has a population of 1 million people and produces \$10 billion worth of goods and services (and thus generates \$10 billion worth of income). The equality standard means that each person in the country receives \$10,000 of income (\$10 billion divided by 1 million). Everyone receives exactly the same income--no more, no less.

• Needs Standard: The needs standard distributes income based on how many goods and services members of society require. Some people need more goods and services, and thus need more income. Others need less. Suppose, for example, that Dan Dreiling spends eight hours a day installing drywall in residential homes, apartments, and office buildings--a physically demanding job, especially for a muscular 6' 4" man like Dan. He burns a lot of calories and needs a lot of food. In contrast, Maryann Mattingly, a petite 4' 10" administrative assistant, spends her working days seated at a desk shuffling papers from one file folder to another. She burns far fewer calories than Dan. The needs standard is in effect if Dan receives proportionally more income that Maryann to purchase the necessary extra food.

### A Mix of Standards

Although purists like to promote the advantages of one standard over the others, all three are typically used in mixed economies, including the United States.
• As a market-oriented capitalist economy, the United States uses the contributive standard as a default for most income distribution. More productive people generally receive more income. Hair Doo receives more income than Alicia because he contributes more to production.

• However, the equality standard also comes into play. In some cases, policy makers enact income redistribution programs based on the conclusion that the rich are too rich and the poor are too poor. This view provides the basic logic behind a progressive income tax system, in which tax rates are higher for people with more income.

• The needs standard also surfaces in particular circumstances. This, for example, is the basis for the welfare system of income transfers to the poor. Income is redistributed to families, mothers, and children based on their needs. For example, Lisa Quirkenstone, a single mother of five, receives a larger monthly welfare check than Pollyanna Pumpernickel, a single mother of two.

### Beware the Imperfections

The use of all three standards in most mixed economies suggests that none of the three is perfect. Total reliance on the contributive standard would see the unproductive young, elderly, and disabled dropping dead in the streets from the lack of food. Total reliance on either the needs or equality standards would destroy economic incentives to be more productive or efficient. The challenge facing policy makers and economists is to investigate, analyze, and debate the tradeoffs of each standard.

### A Normative Distribution

The debate over which distribution standards to use brings into play normative economics and the pursuit of economic goals. Distribution standards, by their nature, are most important for the economic goal of equity. However, they also affect efficiency, economic growth, full employment, and stability. Deciding to implement one standard or another, to pursue one goal or another, is inherently based on what people think is best for the economy, based on a prescription of what should be, not a description of what is. And that is normative economics.

 <= DISSAVING DIVISION OF LABOR =>

Recommended Citation:

DISTRIBUTION STANDARDS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: November 25, 2020].

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