Chapter 2: Income Standards, Inequality, and Poverty
poor person (with an income of $1,000). The next $300 would be spent on the second-richest poor person (with an income of $800). After bringing these two poor people out of poverty, the policy maker still has $600 in his or her budget that remains unused. How and whom should this amount assist? Given that the headcount ratio does not satisfy the monotonicity property, because even if this entire amount is transferred to either of the two remaining poor people, the poorest people still remain under the poverty line and do not add to the headcount ratio. The policy maker in this situation would have no incentive to spend the remaining budget. This lack of incentive creates inefficiency in public spending. Although poverty is reduced by 50 percent, the poverty status of the two severely deprived people remains unchanged. What if the society’s poverty is assessed by the poverty gap measure? Recall that, unlike the headcount ratio, the poverty gap measure satisfies monotonicity; but, like the headcount ratio, it does not satisfy the transfer principle or transfer sensitivity. Thus, it is not sensitive to inequality among the poor. What implication does it have on the targeting exercise? In this case, the policy maker will be inclined to spend his or her entire budget because the poverty gap measure satisfies monotonicity. An increase in a poor person’s income, even when he or she is not driven out of poverty, reduces the poverty gap measure. Therefore, unlike the headcount ratio, inefficiency in public spending does not arise. Then how should the budget of $1,000 be allocated among the poor? The straightforward way is to spend the budget on any of the four poor people as long as they do not surpass the poverty line income. Given that the poverty gap measure is not sensitive to inequality among the poor, it does not matter who among the poor receives the assistance. For example, in one case, out of the budget of $1,000, the richest poor person, with an income of $1,000, may receive $100; the second-richest poor person may receive $300; and the third-richest poor person may receive the rest, or, in another case, the poorest person, with an income of $80, may receive the entire amount. In both cases, the improvements in the poverty gap measure are the same. Thus, the poverty gap measure is insensitive to whoever receives the assistance. The poorest section of a society may perpetually remain poor in spite of showing decent progress in terms of the poverty gap measure. How would this policy exercise be affected when the society’s poverty is gauged by a distribution-sensitive poverty measure? A distribution-sensitive measure requires that assistance should go to the poorest of the poor first. Thus, out of the $1,000 budget allotted for the poor, the first $20 should go
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