Equity vs. Efficiency–and What Other Tradeoffs?

For at least 50 years, economists have been drawing up models that consider tradeoffs between equity and efficiency.

A classic example is that a combination of taxation and redistribution of income by government will improve equity, but on the margin, it can also reduce efficient incentives to work for both the taxed (because they now receive a lower reward for working) and the recipients (who will experience a phase-out of their redistribution benefits as they increase their earnings).

As generations of classroom economists have admonished their students: The existence of a tradeoff doesn’t mean that something is or isn’t worth doing. It just means that, whatever your choice, the tradeoff should be openly specified and acknowledged. The equity/efficiency tradeoff, in particular, will be influenced by the values that people place on equity and efficiency, and economics as a discipline doesn’t have much to say about what values should be used.

But what about other tradeoffs? Equity is not the only value that might be opposed to a desire for more efficient incentives. Tyler Cowen makes the case in a short essay, “The Dubious Trade-Off That Economists Love to Cite,” subtitled “Many public policies involve choosing between equity and efficiency, but those aren’t the only two principles that deserve consideration” (Washington Post, November 1, 2022). Cowen writes:

I start getting nervous, however, when I see equity given special status. After all, it most often is called “the equity-efficiency trade-off,” not “an equity-efficiency tradeoff,” and it is prominent in mainstream economics textbooks. By simply reiterating a concept, economists are trying to elevate their preferred value over a number of alternatives. They are trying to make economics more pluralistic with respect to values, but in reality they are making it more provincial.

If you poll the American people on their most important values, you will get a diverse set of answers, depending on whom you ask and how the question is worded. Americans will cite values such as individualism, liberty, community, godliness, merit and, yes, equity (as they should). Another answer — taking care of their elders, especially if they contributed to the nation in their earlier years — does not always show up in polls, but seems to have a grip on many national policies and people’s minds.

I hear frequently about the equity-efficiency trade-off, but much less about the trade-offs between efficiency and these other values. 

During the pandemic, for example, Cowen points out that a primary conflict was between the value placed individual choice and the efficiency of policies like vaccinations, masks, or shut-downs. When it comes to taxation and redistribution, the public arguments are often not about efficiency costs, but rather about claims involving liberty and beliefs about being rewarded according to some definition of merit. The question of whether or how to alter programs like Social Security and Medicare often touch on equity and incentives, but often quickly turn to value-heavy arguments over society’s obligations to the elderly. In discussions about import restrictions, the focus is often on efficiency gains for the broader economy vs. harms to specific communities. And of course, one could add other values here like environmental preservation.

I suppose one can stretch the idea of equity to cover some of these issues, at least in part. But in doing so, you are really just admitting what we all know: equality, fairness, and justice are complicated in ways that a basic distribution of income or wealth doesn’t fully capture. Looking at equity is a start, but the potential tradeoffs with economic efficiency are multidimensional.