Equity efficiency conflict
VIkas
A much debatable issue in economics revolves around the equity-efficiency conflict.
Equity requires that any benefit (outcome) arriving from any state of affair require to be equally
distributed among the agents. Whereas efficiency require that gain from any state of affair must be
maximum irrespective of how that gain is distributed among the agents. Now it will not take much
time to understand the conflict between the two concepts namely equity and efficiency. Consider an
example of two individual with the income distribution in two state of affair,(A) (3, 3) and(B) (7, 3)
where 3 and 7 is the share of income accruing to the agent one in the two state of affair namely A
and B respectively, same for agent 2. Now given the two allocations an egalitarian would always
prefer an equal distribution (represented by the share of poor people in the allocation) over an
unequal distribution i.e. (3, 3) whereas efficiency will demand for the allocation (3, 7) because at
least one person is better off in the unequal distribution. Any egalitarian starting from the (3, 7)
distribution of income will require to drag down the rich people to the level of poor people’s
income so that equality can be preserved. Thus an egalitarian would prefer (3, 3) even if he is
required to waste or throw away some resources (income) which is known as levelling down. So
principle of equality favours levelling down the welfare of the individuals over the inequality even
if some are better off and no one is worse off under inequality.
But do we really need to sacrifice the resources and thus made individual worse off to attain equity
in the economy?
First, in discussing the equity efficiency conflict we are intrinsically assuming
monotonicity principle, which says that more is always better. Let’s consider an example where we
are concerned about the distribution of bread among persons and we have much more than needed.
Is such a case there is a definite level at which each individual have enough and beyond that level
more does not matter. Is such a case it does not matter how we distribute the remaining bread once
everyone has reached to its satiation point. Thus an egalitarian must be indifferent between the two
situations namely equal distribution (assuming each person’s need got satisfied at one third part of
bread) and the efficient one where it does not matter how the remaining one third part is being
distributed among the individuals. So in such a case levelling down does not make any sense to
preserve equality. Thus the necessary condition for the equality mattering is that things being
equalised such that more is always better then less.
Second, is it really necessary to level down the rich people to the level of poor people so that
equality can be maintained? One can always argue that given the distribution of income (A) (3, 3)
and (B) (7, 3), an egalitarian caring for the equality can go for the keldor compensation test where
he can, moving from A to B, redistribute distribution B such that the gainer can compensate the
looser in such a manner so that looser is no longer looser and gainer still preserve some gain or gain
nothing. One can easily find that moving from A to B we can redistribute B in an equitable manner
let say (5, 5), where gainer (moving form A to B) compensate the looser (moving from A to B) and
thus reach the allocation (5, 5) such that resources do not get unutilised and economy attain both
efficiency and equity in the economy Without any conflict.
But the biggest question arises here is that why an individual will compensate the poor individual
and why should he be bothered about the equality? Because Any rich person does not have any
incentive to compensate the poor people to maintain equality, therefore the government comes with
the concept of tax where the rich person is taxed and tax revenue accruing to the government goes
to the welfare to the poor people through various mechanisms such as public distribution system
(PDSs) etc. But as collecting the taxes from the rich persons will work as a disincentive to work for
them, therefore, they will reduce their economic activity and engage in the tax evading, so that they
can maximise their own welfare. Also taxing the rich person who has most of the resources in their
hand will pass the partial Burdon of tax to the poor people in terms of increase prices. That will
further deteriorate the poor people. Also a well known concept of dead weight loss arises from
imposing taxes in the economy by the government.
A general question arises here that why an egalitarian is bothered about the inequality? Preserving
equality in the economy implicitly assuming that the agents in the economy are equally efficient in
all respect, thus they should be reward an equal share of pie, but how far such an argument is true. It
can easily be seen in the real world that everyone is not equally efficient in all respect and thus a
particular state of affair must reward that individual that is more efficient, as correctly mentioned in
the theory of utilitarianism, where if individuals are not equally efficient and given the diminishing
marginal utility the state of affair would reward more resources to an efficient people. As resource
allocation in the favour of more efficient individual will ensure the optimum utilisation of those
resources and thus the size of pie can be increased over the period of time which will increase the
share of both poor and the richer person, thus a pareto improvement situation for both the person.
And imposing equality in the economy will lead to underutilisation of resources (levelling down
objection) thus efficiency can no longer be attained.
Thus in my opinion efficiency must dominate the equity so that size of pie can be increased over
time and both the section of the economy rich and poor get benefited out of that.
Readings.
Inequality, injustice and levelling down (2008), by Thomas Christiano and Will Braynen
Inequality and Poverty A Short Critical Introduction, by S.Subramaniam