The Pigou-Dalton principle, a cornerstone of inequality measurement, states that any transfer of income from a wealthier individual to a poorer individual, while keeping the total income unchanged, should reduce inequality. This means a more equitable distribution of income is always preferred.
Understanding the Principle
The principle, initially suggested by Arthur Pigou and formalized by Hugh Dalton, focuses on the ethical desirability of reducing income disparities. It doesn't dictate the level of inequality that's acceptable, but rather the direction of change that's preferred. Any income redistribution that moves toward a more equal distribution is considered an improvement, according to this principle.
- Key aspect: The principle is concerned with progressive transfers—transfers from richer to poorer individuals. A regressive transfer (from poor to rich) would, conversely, increase inequality according to the Pigou-Dalton principle.
- Mean preservation: The total income remains constant during the transfer. This ensures that the reduction in inequality is solely due to the redistribution, and not an overall increase or decrease in wealth.
- Application: The Pigou-Dalton principle is widely used to evaluate various inequality measures and social welfare functions. An inequality measure that doesn't adhere to this principle is often considered flawed, as it wouldn't reflect a widely-held ethical preference for reducing inequality in this manner.
Examples
- Scenario 1: Imagine two individuals, one with an income of $100,000 and another with $10,000. A transfer of $1,000 from the wealthier individual to the poorer one would, according to the Pigou-Dalton principle, result in a more equitable distribution and thus is deemed an improvement.
- Scenario 2: Conversely, a transfer of $1,000 from the poorer individual to the wealthier one would represent a regressive transfer, increasing inequality according to the principle.
Formal Definition (Based on provided references):
Dalton (1920, p. 351), following Pigou (1912, p. 24), defines the principle as: "every inequality measure should at least decrease as a consequence of any income transfer from an income-receiver to another with a smaller income ("from the richer to the poorer")."
This concisely captures the essence of the principle: progressive transfers decrease inequality.
