Inequality, neighbourhoods and welfare of the poor

This paper investigates how neighbourhood effects interacting with income inequality affect poor people's ability to access basic facilities like health care services, schooling, and so on. We model this interaction by integrating consumers' income distribution with the spatial distribution of their location and explore the consequences of an increase in income inequality or variations in the neighbourhood characteristics on the welfare of the rich and poor in general, and their access to market in particular. We find that, in general, the impact will be non-monotonic owing to an interesting trade-off between the provision effect and the price effect. On the one hand, there is the positive ‘provision effect’: higher valuation of the rich attracts the supplier to enter into the neighbourhood, allowing the poor who live sufficiently close by to access the service. On the other hand, there is the negative ‘price effect’: the service provider charges a higher price higher is the income or larger is the proportion of the rich in the neighbourhood. In the extreme, there exists the possibility of complete exclusion of poor from the market: the service provider caters only to the rich and the poor has absolutely no market access. We have identified the higher income gap between rich and poor as the key factor that exposes the poor to this complete exclusion possibility.