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Q#3: Identify and briefly explain key five policy steps to improve income distribution.
1. Fixing factor price distortions
the relative price of labour is higher in the modern sector as a result of institutional
constraints and faulty govt policies than would be determined by the forces of demand
and supply. If the prices were lower as they usually are when the market is allowed to
operate freely then most capitalist would subsititue labour for capital and thus increase
employment. This would increase the incomes of the poor who had previously been
excluded from the modern sector employment. On the contrary setting higher minimum
wages have also been reported to reduce poverty.
On the other hand distortions in the capital markets artificially pull down the prices of
capital as a result of investment incentives, tariff free imports of such goods etc. if such
priveleges were removed, the prices of capital would rise and then again capitalists
would resort ot employing more labour instead of machinery. This would also help to
set the balance of income distribution right.
Lowering the relative price of labour and raising the relative price of capital would also
help in reducing the artificially high incomes of the capital owners.