Efficiency vs Equity
A big issue in economics is the trade off between efficiency and equity. hixxam.blogspot.com
For example, the Community Charge (poll tax) was considered to be economically efficient because a poll tax doesn’t distort economic behaviour. (e.g. doesn’t reduce incentives to work). However, by making a millionaire pay the same tax as a poor pensioner, it was considered to be unfair.
A tax on cigarettes can be said to increase social efficiency. The tax makes people pay the social cost of smoking. However, a cigarette tax is also highly regressive. It takes a bigger % of income from low income earners.
pareto efficiency is concerned with creating a situation where we cannot make one party better off without making another party worse off.
For example, a country may devote 60% of GDP to the manufacture of armaments. In doing this, they may achieve technicaland productive efficiencyand produce on their production possibility frontier. Therefore from this perspective they are efficient. But, such an economy may have a great deal of inequality, with large portions of the population struggling to have enough to eat.
- Efficiency is concerned with the optimal production and allocation of resources given existing factors of production. Equity is concerned with how resources are distributed throughout society.
- Vertical equity is concerned with the relative income and welfare of the whole population e.g. Relative poverty when people have less than 50% of average income. Vertical equity is concerned with how fairly resources are distributed and may imply higher tax rates for high income earners.
- Horizontal equity is treating everyone in same situation the same. e.g. everyone earning £15,000 should pay same tax rates.
For example, the Community Charge (poll tax) was considered to be economically efficient because a poll tax doesn’t distort economic behaviour. (e.g. doesn’t reduce incentives to work). However, by making a millionaire pay the same tax as a poor pensioner, it was considered to be unfair.
A tax on cigarettes can be said to increase social efficiency. The tax makes people pay the social cost of smoking. However, a cigarette tax is also highly regressive. It takes a bigger % of income from low income earners.
pareto efficiency is concerned with creating a situation where we cannot make one party better off without making another party worse off.
For example, a country may devote 60% of GDP to the manufacture of armaments. In doing this, they may achieve technicaland productive efficiencyand produce on their production possibility frontier. Therefore from this perspective they are efficient. But, such an economy may have a great deal of inequality, with large portions of the population struggling to have enough to eat.
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