Question

Distinguish between equity and efficiency. b) What is consumer sovereignty and how is it manifested in a market system? c) Would you describe the market system as equitable or efficient? Detail your reasoning. d) Which of the following is motivated by an efficiency concern? Explain your reasoning. i. In 2009, the Obama administration increased unemployment benefits. ii. As part of an economic stimulus package, each taxpayer received a $3,000 tax rebate check. iii. Following a six-month drought, a city banned homeowners from watering their lawns in an effort to conserve water. iv. Some U.S. colleges have cut back on merit scholarships since these programs siphon money from need-based programs, thus harming lower-income students with greater financial need.

Answer 1

Solution

Equity is a measure of how / manner in which the resource is distributed among the different set / class of consumers / stake holders in an economy(i.e., whether the resources have been fairly distributed among the various stakeholders in the society (or) not)whereas efficiency refers whether the limited resources have been distributed to cater the needs of the society in such a way that there is no way to make someone better off without making at least one person worse off.

b) Consumer sovereignty refers to the right that the consumers have over what to be produced by the producer i.e., the need and wants of the consumer decide the output of the producers.

In a perfect market,the market forces - demand and supply control answer the 3 basic questions in economics - what ,how& how much and whom and when to produce.

So,it the demand and need of the customer which decides what to be produced in an economy so it economy will be efficient as their will be less wastage of resources.

c) I would describe the market system as efficient because the producers cater to demands from different sections of the people and structure their output in such a way that their main motive of profit maximization is achieved.

Ex: If the demand from consumers for the existing 2 different types of sports shoes (premium and normal) increases by 20 % each,then there is no guarantee that the producer(s) will increase their output of the 2 categories by the same,equal 20% , but the producers can choose to increase their subsequent production of only premium segment by 30 % (prioritizing) and normal segment by only 10% because the premium category yields higher profits than the normal category.

Here the fairness (equity) is not maintained but the efficiency is maintained as the producers are prioritizing their limited resources in the production of 2 different kinds of goods

d).Which of the following is motivated by an efficiency concern :

iv. Some U.S. colleges have cut back on merit scholarships since these programs siphon money from need-based programs, thus harming lower-income students with greater financial need - This is efficient from the perspective of the US colleges because prior to this the income gained from need based programs use to pay for the merit scholarships.

So,by cutting back on the merit scholarships for low-income groups , the colleges can reduce the fee for the need-based programs instead according to the demand and need for the same in the market. Prior to this the US colleges are not having / having very less choice in pricing the fee for the need based programs.They had to price in such a way that they could subsidize the merit scholarships but not according to the cost incurred (or) demand for the courses from the students.

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