Chapter 2: Income Standards, Inequality, and Poverty
producers would be adversely affected because their income would fall, and rice consumers would benefit because their real incomes would increase. Given that most rice consumers are poorer than rice producers, one does not know whether more or fewer people would become poor. Thus, the impact on the headcount ratio is uncertain. However, if the price of rice increases, then producers gain, but the poorer consumers lose because their real incomes fall. Given that the already poor consumers become poorer, this is not taken into account by the headcount ratio because it does not satisfy monotonicity. Therefore, the number of poor people would most likely fall, thereby leading to a fall in the country’s headcount ratio. Thus, the potential assessment of poverty using the headcount ratio would incline the government to choose option 2 and increase the price because poverty, according to the headcount ratio, would fall. Note, however, that the decrease in the headcount ratio has ignored the change in inequality among the poor. The marginally poor producers would become better off because of the price increase, but the severely poor people would be worse off for the same reason. This occurrence is very similar to the idea of regressive transfer. The higher price paid by the poorer consumers is obtained by the lesser poor producers as profit. Any inequality-sensitive poverty measure, such as the squared gap, the Watts index, or the SST index, would be sensitive to such inequality among the poor. Suppose the poverty level in that country is now assessed with one such measure that is sensitive to inequality among the poor. If the government now chooses option 1 and reduces the price of rice, then the poorer consumers benefit at the cost of a reduction in the producers’ income. The result is uncertain. If some producers become poorer than some consumers, then the poverty measure may increase. But if the producers remain less poor than the consumers, then the poverty measure may fall. However, if option 2 is chosen and the rice price rises, then inequality among the poor increases and, most certainly, the poverty measure would increase. Hence, the potential assessment of poverty using any inequalitysensitive poverty measure would incline the government to not raise the price because poverty, according to any inequality-sensitive measure, would increase. The conclusion is that different poverty measures would incline the government to choose different policies.
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