Question

1. Is there necessarily a trade-off between equity and efficiency?

give an example when there is and another one for when there isn't a trade-off

2. Does the rate of income mobility within a person's lifetime matter for how we assess/ measure inequality?

3. Does the rate of intergenerational income mobility matter for how we assess/measure inequality?

Answer 1

Answer 1. Is there necessarily a trade-off between equity and efficiency?

* Introduction:

In any society at any point of time all the resources would be relatively scarce. We cannot have whatever we want. We need to decide our priorities and then distribute the resources. In such a situation we need to take into consideration goals of efficiency and equity. If the distribution of resources or goods in an economy is fair between different members of the society, it indicates equity. Efficiency is making the best out of scarce resources at the best possible price. "Efficiency refers to the size of economic resource and equity refers to how this economic resource is distributed." When the resources are distributed, we will be faced with a trade-off between efficiency and equity. This trade off is a central principle in economics.

However, we can say that, there is a trade-off between equity and efficiency but it cannot be in every situation. Explanation is mentioned below:

- Example of trade off between equity and efficiency can be explained with "environmental policy" of the government. Who gets the most out of exploiting the natural resources and what cost is a policy question that needs to be answered. The projects undertaken would have an adverse effect on the local people who might be living there from many generations. These become the victims of the project. But government programmes and projects would have multiple objectives in the larger interest of the nation. So there would have to be a trade off between the efficient use of resources in that area and the equity of resources distribution to the people of that area. In order to do that the people who are enjoying the benefits of the policy would have to pay for the victims of the policy and make them the stakeholders in the developmental works undertaken.

- The hardest problems are those that involve trade-offs, especially between improving the efficiency of the market and promoting equity. Many times government takes hard trade-offs but sometimes efficiency and equity go hand in hand. Providing Educational opportunities and health infrastructure to the poor will be both equitable and efficient at the same time. It provides for fair distribution of the resources for the well being of the people which in turn increases the efficiency of the economy because more number of people will be productive. We can observe these kinds of policies more in developing countries where the state would undertake land reforms, tax concessions, and welfare programmes etc. for the people. Here the government concentrates on the inefficacy of the market and inequalities it produces and tries to counter them through a slew of measures.

- However, Economy alone cannot decide the best way to balance equity and efficiency. Example of this issue involves the social and political factors also. Let us look at the "Tax system in India for our case." India in the early years after independence used to have a progressive system of taxation in which the rich people had to pay higher amount of taxes depending on the their income in that particular year. But the after liberalisation our economic and political agenda differed on the views on equity and efficiency. It was argued that high tax rates reduce economic efficiency and also incentive to work. So tax reforms were brought and now there are only three slabs are present for income tax. Even the highest earner would pay not more than 30% of his income as tax. We can see that there is a constant trade off between equity and efficiency in this case.

Conclusion: We can conclude by saying that, there is often a trade-off between equity and efficiency but that might not apply to all the cases. Most of the social welfare measures that we undertake can be aimed at both equity and efficiency. In some cases efficiency may be compromised for equity and in other cases equity may be compromised for efficiency. But all these kind of decisions would be taken under a guided and well informed policy making environment so that it works for the overall well being of the society concerned.

Answer 2. Does the rate of income mobility within a person's lifetime matter for how we assess/ measure inequality?

* Introduction: Income Mobility is defined as individual income growth refers to an aggregate measure of the changes in income experienced by each individual within the society between two points in time, where the individual-level changes might be gains or losses.

Explanation of Rate of Income mobility within as person's lifetime to measure Inequality:

The income for each individual is defined as the longitudinal average of incomes in each period. Averaging across time smooths the longitudinal variability in each person’s income and, in addition, the inequality across individuals in these longitudinally-averaged incomes will be less than the dispersion across individuals in their incomes for any single period. "Mobility can therefore be characterized in terms of the extent to which inequality in longer-term income is less than the inequality in marginal distributions of period-specific income". The zero mobility reference point is when the income of each person in every period is equal to their longer-term income there is complete rigidity. "At the other extreme, maximum mobility occurs when there is inequality in per-period incomes but no inequality at all in longer-term incomes." The issue of whether everyone can be upwardly (or downwardly) mobile does not arise with this mobility concept because it defines mobility using inequality comparisons, and inequality is measured at the aggregate (population) level. There are similarities between this concept of mobility and the rank reversal flavour of the positional change concept since both are concerned with movement, but they use different reference points to assess this (longer-term incomes versus base-period positions respectively).

3. Does the rate of Inter-generational income mobility matter for how we assess/measure inequality?

Introduction: A central concern is that the recent increases in inequality have translated into a society that is less mobile, with opportunities less widely shared. This concern shows that countries with higher income inequality have less inter-generational income mobility. However, there is considerably less evidence on the trends in inequality of opportunity than on inequality of outcomes.

Inter-generational income mobility refers to the extent to which income levels are able to change across generations. If there were no inter-generational mobility at all (that is, the inter-generational income elasticity=1), all poor children would become poor adults and all rich children would become rich adults.

In the case of complete inter-generational mobility (that is, the inter-generational income elasticity = zero), there would be no relationship between family background and the adult income outcomes of children. A child born into poverty would have exactly the same likelihood of earning a high income in adulthood as a child born into a rich family.

*Explanation of Inter-generational income mobility matter for how we assess/measure inequality:

-The inter-generational income mobility indicator is a good companion indicator to inequality. While income inequality can be thought of as an indicator of equality of outcome, the inter-generational income mobility indicator can be thought of as an indicator of equality of opportunity.

-Some countries are more concerned about ensuring equality of outcome—in other words, ensuring that there are no large income gaps. The Scandinavian countries, for the most part, fall into this group.

- Other countries are more interested in ensuring that there is equality of opportunity. The reasoning is that as long as everyone has the same opportunity to move up the income ladder, gaps in income are not unfair; they reveal differences in such things as education and employment choices. The U.S. falls into this group.

Conclusion: Therefore, it can be concluded by saying that, both optimism and pessimism regarding prospects for addressing inequality has been explained.Barriers to economic opportunity are pervasive, and the growth in inequality of income has both increased the stakes associated with confronting barriers and increased the difficulty in overcoming these obstacles.