Moyes 1

Jonathan Moyes

Mr. Ellis

Microeconomics

Wednesday, September 12, 2007

Chapter 1, Page 17, Question 13

Equity vs. Efficiency

Equity and efficiency are usually not two values that are perfectly

correlated. In most cases the most equitable way of doing something is

not perfectly efficient. At the same time, things that are efficient are

almost always less than perfectly equitable.

Equity, defined in the scope of Economics, is best described as a

even and fair distribution of a community’s scarce resources. Progressive

tax rates are an example of one way to achieve equity amongst a

population. Individuals who have higher incomes would be taxed at a

higher percentage than individuals with comparatively lower incomes.

The revenues accrued through this taxation could be funneled into

government subsidies to support welfare and other benefits for society –

especially for the poor. This promotes fair and even distribution of

wealth.

An efficiently organized economic system generally includes an

emphasis on specialization. In a classic example, a farmer buys a large

plot of land and cultivates a large crop of wheat. This wheat is then
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purchased by a large processor which refines the wheat into flour, a usable

input in the production of bread. The bread is then sold to consumers

across the country. This example includes three cases of specialization.

B y contrast, what if each of the consumers that bought a loaf of bread,

decided to plant their own wheat, refined it into flour, and bake their own

loaf of bread. The cost of the second example is much higher than the

first – both in physical and labor costs – as well having a much higher

opportunity cost. The opportunity cost can be mimimized by using the

first example because the farmer is more efficient at farming – so make

him do the farming. The processor is more efficient at making flour, and

so on. Specialization leads to efficiency.

Some people believe that everyone should be guaranteed the best

healthcare possible. The humanitarian reasons to support this notion are

clear, but the economic incentives require closer examination to come to a

solid conclusion. The idea obviously promotes general equity amongst the

population, but is it the most efficient allocation of resources? All

resources are finite, so a balance between efficient allocation of resources

and equitable distribution of those resources is imperative for the success

of an economic system. The money that would be spent on equitable

healthcare for the population may be being taken away from the defense

budget, introducing a susceptibility to possible attacks. A balance

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between defense spending and support of the healthcare s ystem would be

the logical and efficient solution.

Another example of the tradeoffs between equity and efficiency can

be illustrated by the following statement: “When workers are laid off, they

should be able to collect unemployment benefits until they find a

new job.” If this were the case, people who loose their jobs would

continue collecting unemployment benefits for a long time because the

incentive to look for a new job is reduced by the benefits they can

continue receiving. Such people are known as ‘free-riders’ in the

economy and are an economic drain on the society in which the live. They

promote neither equity nor efficiency.

A balance between an equal and efficient allocation of resources is

ver y important to achieve because it leads to a fair and economically

productive society.