Since biblical times humanity has been preoccupied with the phenomenon of poverty. It is recognized that some individuals live more comfortably than others or, in harsher times or circumstances, that some of our neighbors are hungry and that others live in affluence. Although the phenomenon is widely recognized, it is difficult to agree on a definition of poverty. How can we recognize a poor household from a non-poor one? Usually, this is solved by specifying a net household income, which we denote byand which we call the poverty line. If the household under consideration has an income smaller than , then it is considered to be poor. It follows that it is rather crucial how we decide on where to place the poverty line. It is clearly a very relevant problem for modern societies, as one of the primary tasks of the modern welfare state is the creation and the running of a social-security system. That system boils down to a redistribution system where the non-poor pay a tax or contribute to a fund in order to alleviate the plight of the poor. It follows that the position of the poverty line is extremely important. If it is set at a high level such that, for example, 30 percent are poor, the volume of transfers will be high, while if the poverty line is set at a low level and, for example, 5 percent are poor, the transfer will be rather unsubstantial. It is evident that it will be much easier to get political support and acceptance for a relatively small redistribution than for a system which entails a rather large redistribution.
A number of poverty definitions have been suggested and put into practice; for example, in the USA and Europe. The difficulty with defining the concept of a poverty line is that poverty is a feeling and not an objective situation. Of course it has to do with 'command over commodities': we may describe a household consumption level either in terms of a commodity basket or more concisely by a net income level y. But how can we decide whether the level thus described causes a feeling of 'poverty'? Some households will feel 'poor' at a specific level whereas others do not. One way to overcome this problem is to appoint some experts to define the poverty line in terms of