(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 637

612 PART • Information, Market Failure, and the Role of Government TABLE 16.2 FOUR VIEWS OF EQUITY Egalitarian—all members of society receive equal amounts of goods Rawlsian—maximize the utility of the least-well-off person Utilitarian—maximize the total utility of all members of society Market-oriented—the market outcome is the most equitable The four views of equity in Table 16.2 move roughly from most to least egalitarian While the egalitarian view explicitly requires equal allocations, the Rawlsian puts a heavy weight on equality (otherwise, some people would be much worse off than others) The utilitarian is likely to require some difference between the best- and worst-off members of society Finally, the market-oriented view may lead to substantial inequality in the allocations of goods and services Equity and Perfect Competition A competitive equilibrium leads to a Pareto efficient outcome that may or may not be equitable In fact, a competitive equilibrium could occur at any point on the contract curve, depending on the initial allocation Imagine, for example, that the initial allocation gave all food and clothing to Karen This would be at OJ in Figure 16.8, and Karen would have no reason to trade Point OJ would then be a competitive equilibrium, as would point OK and all intermediate points on the contract curve Because efficient allocations are not necessarily equitable, society must rely to some extent on government to achieve equity goals by redistributing income or goods among households These goals can be reached through the tax system For example, a progressive income tax whose funds are used for programs that benefit households proportionally to income will redistribute income from the wealthy to the poor The government can also provide public services, such as medical aid to the poor (Medicaid), or it can transfer funds through such programs as food stamps The result that a competitive equilibrium can sustain every point on the contract curve is a fundamental result in microeconomics It is important because it suggests an answer to a basic normative question: Is there a trade-off between equity and efficiency? In other words, must a society that wishes to achieve a more equitable allocation of resources necessarily operate in a manner that is Pareto efficient? The answer, which is given by the second theorem of welfare economics, tells us that redistribution need not conflict with economic efficiency Formally, the second theorem states the following: Recall from §3.1 that an indifference curve is convex if the MRS diminishes as one moves down along the curve If individual preferences are convex, then every Pareto efficient allocation (every point on the contract curve) is a competitive equilibrium for some initial allocation of goods Literally, this theorem tells us that any equilibrium deemed to be equitable can be achieved by a suitable distribution of resources among individuals and that such a distribution need not in itself generate inefficiencies Unfortunately, all programs that redistribute income in our society are economically costly Taxes may encourage individuals to work less or cause firms to devote resources to avoiding taxes rather than to producing output So, in effect, there is a trade-off