Question

1. In this class you have been introduced to the goals of efficiency (achieving the most net benefit)
and equity (achieving more equal outcomes). The tradeoff between these goals can be seen in
markets such as health care, labor, and housing. Explain how a policy maker’s values regarding
the importance of efficiency versus equity would cause them to intervene in a market, or leave it
alone.

2. Some people might argue that Monopoly is better than Perfect Competition, because monopolies
generate more profit than perfectly competitive firms. Critique this argument by evaluating its
logic and reasoning.

3.

Economists sometimes argue about the effects of the minimum wage:

• Advocates of a higher minimum wage point to evidence that in big cities changes in the
  minimum wage do not reduce the number of workers in each restaurant.
• Those who oppose a higher minimum wage point out that those groups most affected by the
  minimum wage (unskilled workers, teenagers) have higher rates of unemployment than other
  groups.

Evaluate the strength of each of these bits of evidence, and briefly explain which you find most
convincing.

Answer 1

  As given, efficiency refers to a process of achieving the best possible outcome or benefit whereas equity refers to the process of attaining more equal outcomes rather than shifting the focus on the best possible outcome. In an economy or market system there is always a trade off between equity and efficiency. It is assumed that profit making is the prime motive of a market and hence a market always would have more focus on being efficient. But unless equity is maintained in the process of conducting a market, efficiency could not be achieved in a long run.

                                    The effect of this trade off can be seen in many sectors of an economy as given like health sector, labour sector, housing sector etc. Let us first consider the health sector. The process of having focus on the efficiency would mean that the systems like hospitals and its machinery would perform well so as to meet the needs of those who approach them on a better scale. But in such a sector, what is really needed is equity of the service which would mean that all the sections of the society would get better treatments in healthcare rather than some sections getting advanced care. Similarly, an efficient labour market would have more focus on the production and an equity labour market would focus more on labour welfare along with production capabilities.

                                    A policy maker, in an economic system should focus on both efficiency and equity so that a balanced outcome and effect on an economy is attained. The intervention of the policy maker in a market always depends on the importance given to both. For example, consider the action of a policy maker in the health market. Consider that the healthcare system of an economy is efficient in a way that its death rate or patient relief rate is very high considering the people who approach the healthcare system. Thus, in such a system, the policy maker can opt not to intervene in such a system since it is efficient. But for a policy maker who thinks that a healthcare system should also focus on the whole society and provide better care to the needy, then it could result in many policy decisions that could change the healthcare system with the focus being given to both. Similar is the case for other sections also. Thus, it is evident that the approach of a policy maker to introduce policy decisions in an economy is always influenced by the mix of efficiency and equity.