Question

Explain the equity-efficiency trade-off in economics

Answer 1

In any community all resources will be fairly limited at any point in time. We really can't have everything we want. We have to decide our goals and then allocate the money. In such a situation we need to understand productivity and equity (fairness sense) objectives. If the allocation of resources or goods between different members of society in an economy is equal, it means equity. Performance gets the most use of scarce capital at the lowest price possible. Performance refers to the size of the economic resource and equity refers to the distribution of that economic resource. 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.

The Government's environmental policies will illustrate the best example of trade off between equity and performance. Who gets the most out of natural resource extraction and what cost is a policy issue that needs answering. The projects undertaken will have a negative impact on the locals who might have been living there for many decades. These are the project's perpetrators. Yet policy programs and initiatives will have several purposes to the nation's greater benefit. Therefore there should be a trade off between the effective usage of resources in that area and the value of the allocation of resources to the people in that region.To do so, the people who reap the benefits of the policy will have to pay for the policy's victims and make them the partners in the development works undertaken.

Economy alone can not determine the best way of balancing equity and effectiveness. This topic often focuses on the social and political factors. Let's look for our case at Indian tax scheme. India used to have a progressive taxation scheme in the early years of independence in which rich citizens had to pay higher taxes based on their income in that particular year. Yet the post-liberalization perspectives on fairness and productivity varied in our economic and political agenda. High tax rates were argued to reduce economic efficiency, as well as motivation to function. The tax changes have been implemented and now there are only three income tax slabs present

We may assume that there is always a trade-off between equity and performance but this may not be true in all situations. Most of the social welfare initiatives we are taking will target equity as well as performance. Productivity may be sacrificed for equity in some cases, and equity may be sacrificed for productivity in other cases. But all these kinds of decisions should be made in an atmosphere of directed and well-informed policy making such that it works for the overall good of the community concerned.