Redistribution function
Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Class 12, Ch 5 "Government Budget and the Economy"
Meaning
The redistribution function is the budget's job of changing how income is shared among people. The aim is a distribution that society considers "fair". The government uses taxes and transfers to change people's personal disposable income, the income households actually have left to spend after taxes and any government payments. The main tools are:
- a progressive income tax, where people with higher incomes pay a higher rate;
- welfare transfers, such as pensions and cash support.
Example
A progressive income tax takes a bigger share of income from high earners. The government can then use that money for old-age pensions or direct cash transfers to farmers, such as PM-KISAN's ₹6,000 a year. This moves disposable income towards poorer households.
Don't confuse with
- Allocation function: this function is about supplying goods the market cannot supply, such as defence. Redistribution is about who ends up with how much income.
Related concepts
- Allocation function
- Stabilisation function
- Public goods
- Private goods
- Non-rivalry
- Non-excludability
- Free-rider problem
- Club goods
- Merit goods
- Demerit goods