What Is an Equity-Efficiency Tradeoff?

An equity-efficiency tradeoff is when there is some kind of conflict between maximizing economic efficiency and maximizing the equity (or fairness) of society in some way. When and if such a tradeoff exists, eco🐟nomists or public policymakers may decide to sacrifice some amount of economic efficiency for the sake of achieving a more justౠ or equitable society.

Understanding the Equity-Efficiency Tradeoff

An equity-efficiency tradeoff r𝓰esults when🦋 maximizing the efficiency of an economy leads to a reduction in its equity—as in how equitably its wealth or income is distributed.

Economic efficiency; producing those goods and services that provide the most benefit at the lowest cost, is a primary 澳洲幸运5官方开奖结果体彩网:normative goal for most economic theories. This can apply to an individual consumer or a business firm, but mostly, it refers to the efficiency of an economy as a whole in satisfying the wants and neeꦡds of the people in the economy.

Economists define and attempt to measure economic efficiency in several different ways, but the standard approaches all involve a basically 澳洲幸运5官方开奖结果体彩网:utilitarian approach. An economy is efficient in this sense when it maximizes the total utility of the participants.

The concept of utility as a quantity that can be maximized and summed up across all people in a society is a way of making normative goals solvable, or at least approachable, with the positive, mathematical models that economists have developed. 澳洲幸运5官方开奖结果体彩网:Welfare economics is the branch of economics most concerned with calculating and maximizing social utility♍.

A conflict (and tradeoff) b🦂etween efficiency and equity can occur if the members of society—or the policymakers who decide how a society operates—prefer other moral or ethical systems over pure utilitarianism. When people decide that other moral values or rights outweigh pure utility maximization, societies often pursue policies that do not lead to maximum social utility in favor of these other values.

Examples of the Equity-Efficiency Tradeoff

If the utility that one individual gains by poking another person in the eye is greater than the suffering caused, then a purely utilitarian approach would permit or even encourage eye poking to maximize total social utility. However, almost all people would agree that this violates basic morality and leads to an inequ💝itable outcome for the eye-poking victim.

In a more complicated example, it is often the case that the greatest economic gains—and thus the greatest total utility—occur when the most successful businesses and entrepreneurs earn higher inco🦋mes than others, to encourage more productive behavior.

However, this may lead to very unequal incomes. When this happens, policymakers may decide that it is better for society to redistribute some income from higher- to lower-income individuals for the sake of fairness, even though this might redu🌳ce the utility of the high-income earners or even society as a whole.

This is the most common form of the equity-efficiency tradeoff, though i🌠t also can involve the production, distribution, and consumption of all kinds of goods and services rather than just incomes.

The Bottom Line

The equity-efficiency tradeoff represents the conflict between maximizing economic efficiency and achieving social equity. While economic theories often prioritize efficiency, policymakers may choose to sacrifice some efficiency to promote fairness, such as through income redistribution. The balance may be difficult to obtain, but the Nordic model, for example, shows that equity and efficiency can coexist under certain cultural and institutional conditions.