Question

There are many difficulties facing governments of solving equity problems without negatively affecting efficiency (for example, inheritance taxes). Find another example that illustrates this point. Point out the efficiency and the equity implications. (300 words)

Answer 1

Bringing equity will lessen down the efficiency levels and via versa as -

Efficiency is linked with the optimal production and allocation of resources via employing the existing factors of production in the best possible way. However, equity links to the distribution of the resources equally in the society which further can be of two types one - Vertical ;in which there is relative income and welfare of the society as whole and other - Horizontal ; treating all same in one particular situation

Examples :

• POLL TAX - it is one of the most common example as tax paid by all is same , regardless to their income. Which means a high earning individual and a small peasant will pay same tax ,making it unfair
• CIGARETTE TAXES - it is believed to improve social efficiency ,as it's externalities are negative making social cost to be higher than personal . But it's more regressive as it takes a huge chunk of income from low income earner.

Efficiency and Equity implications :

There is always a trade off done between them by the government. There are economic policies in which all can be made better off. But the high income earners tend to have more rise in income however there can be inequality in terms of income . Wherein, the fact is that owing to income difference which will vary due to knowledge, education and experience etc ,the other or low income group feels to be worse off.

It is like trickle down effect , wherein the poor tend to get small rise in income and rich tend to get higher absolute rise in income.

Conclusively, there exists no need to trade off as such between the two. As an improvement in efficiency will put the economy in a better place . It is compatible to improve both efficiency and Equity in long run.

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