Equity and efficiency are the two big goals to choose between in order to achieve the best results in the economy as a whole. These objectives are generally contrary or conflicting.
In other words, achieving efficiency and equity are very big challenges that the economy has to face. Given that, it is very difficult to achieve the most efficient use of resources and then achieve the allocation of wealth produced in the most fair way possible.
Generally, governments use fiscal policies to achieve equity compliance. Through taxes a redistribution of wealth is carried out. Making all the people in the productive sector of society contribute to the support of the poorest.
Of course, this policy must be very well structured. So that taxes are as neutral as possible to avoid discouraging the efficiency of economic activities. Indeed, no tax is absolutely neutral because it always affects the income or wealth of the taxpayer. But, it must be sought that taxes affect the people who are producing the wealth as little as possible.
Example of efficiency and equity
In order to exemplify efficiency and equity, we are going to give a simple example, which has nothing to do with the economy, but allows us to understand these principles. Let’s imagine a group of students in an economics course who are told that they will have an exam next week.
Of course, each student will strive differently. Some of them put in a lot of effort, they will stop going out with their friends and doing other time-consuming activities. This with the purpose of studying as long as possible to prepare and obtain the best result.
On the other hand, there will be another group of students who will make less effort. This would mean going about your normal life, without sacrificing much to spend time preparing for the exam. Clearly, the results will be very diverse.
How efficiency works in this example
Naturally, some students will get great grades and others poor results. Students who put in a lot of effort will get great grades and even some recognition or praise from their teacher. For their part, students who did not apply themselves sufficiently get low grades and some scolding for their poor performance.
Of course, if what is sought is efficiency in the educational process, each student gets the grade they got according to their work and dedication. No doubt someone could argue that it is unfair, because the system was not fair. As a consequence, some have more than others.
How equity works in this example
On the contrary, if what the system seeks is equity. When grading the exams, the teacher considers that it is not fair that some have very high grades and others have very low grades. Then, he will take an average of all the scores and assign the same score to all the students so that the principle of equity is fulfilled.
Consequently, in this case compliance with the principle of efficiency would be annulled because everyone obtains the same result. Since, the one who worked hard, thinks it’s not worth the effort. Because, he gets the same grade as the student who did nothing. While, the one who did not make an effort is satisfied with the little he does, because he still received more than he deserved.
In conclusion, it can be stated that efficiency and equity are two different objectives that are expected to be achieved in each economic system. But, we cannot forget that efficiency is the central concept of the economy. Given that, the better the resources are used, there will be the possibility of solving a greater number of the needs that a society faces. However, equity seeks a better distribution of the wealth produced.
Finally, it is difficult to agree with these principles. Because efficiency gives priority to individual performance, everyone receives what they are capable of producing. However, equity has a social connotation and seeks greater distributive justice. To avoid that some have a lot and others very little.