Equity efficiency debate Which is about the cost of making life fair

What is efficiency An economic system is usually said to be relatively more efficient than another under one or both of the following conditions: Allocative or Pareto efficiency: no one can be made better off without making someone else worse off. Productive efficiency: no additional output can be obtained without increasing the amount of inputs, and production proceeds at the lowest possible average total cost.

EQIUTY/EFFICIENCY TRADE OFF EQUITY EFFICIENCY A B When a government attempts to achieve a more equitable income distribution by re-distributing market income, it may cause losses in efficiency in the operation of the market. This is an opportunity cost which should be considered.

Market Fails and Gov Fails?

Why?

Transfers Welfare benefits are transfers from the government to those that cannot provide for themselves or need assistance. Benefits become available for people in case of Sickness Accident Unemployment Old age Disability Benefits can be targeted (available to a certain group, unemployment) or universal ( available to everyone, superannuation)

Welfare Trap Danger with targeted assistance. The situation where person’s income increases and because of means testing, level of entitlement to benefits decreases. People can get trapped into narrow income brackets and loose the incentive to better their circumstances.

Tools for Re-Distribution In many countries the government believes the market distribution of income is inequitable. It therefore uses some tools to re-distribute income and make the distribution more equal. Some tools are Progressive income tax Transfer payments Public provision Minimum wage legislation Equal opportunity initiatives Positive discrimination

LOSS OF EFFICIENCY Progressive income taxes Disincentives to work or take risks Compliance costs increase Transfer payments Disincentives to work Public provision No clear price signals for resource allocation Minimum wages May creates disequilibrium in the labour market

Socially optimal allocation of resources Utilitarianism Equal distrubution Distribution according to needs

Opportunity, Minimalist State

Maxmin Theory

Commodity egalitarism Does not matter who has what as long as the are able to survive

Economic Calculation Problem Ludwig von Mises Austrian School of Economy