Lorenz Efficiency is a measure used to assess the efficiency of income distribution within a given population. It is derived from the Lorenz curve, which graphically represents the distribution of income or wealth among individuals or households. The Lorenz curve plots the cumulative share of the total income received by the bottom of the population against of the population itself. A perfectly equal distribution would be represented by a 45-degree line, while the area between the Lorenz curve and this line indicates the degree of inequality.
To quantify Lorenz Efficiency, we can calculate it as follows:
where is the area between the 45-degree line and the Lorenz curve, and is the area under the Lorenz curve. A Lorenz Efficiency of 1 signifies perfect equality, while a value closer to 0 indicates higher inequality. This metric is particularly useful for policymakers aiming to gauge the impact of economic policies on income distribution and equality.
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