2.12 The market’s inability to achieve equity
Income is a flow of money going to factors of production; it includes wages, rental income, and interest from savings etc. Wealth is the current stock of assets owned by an individual or by society as a whole; it includes savings in bank accounts, property, and shares in business.
The operation of the free market may lead to an unequal distribution of income and wealth in society. Effective demand means the willingness and ability of consumers to purchase goods at different prices. The free market will only respond to those who are willing and able to purchase, and will not respond to the needs of those who want to purchase goods but do not have the ability to do so. The circular income flow model in Figure 2.12.1 highlights free market's inability to achieve equity. Free market would respond to households who are willing and able to pay, as shown by the real flow of "goods and services" to the household.
This unequal distribution of income and wealth may lead to a mis-allocation of resources and other issues: for example, poorer families tend to have lower life expectancy.
