Equity and efficiency are the two major goals that must be chosen to achieve the best results in the economy as a whole. These goals generally result in being opposed or counterposed.
In other words, achieving efficiency and equity are very big challenges that the economy has to face. Given that, it is very difficult to take advantage of resources in the most efficient way and then achieve the fairest possible allocation of the wealth produced.
Generally, governments use fiscal policies to achieve equity. Wealth redistribution is achieved through taxes. This ensures that all 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 economic activities. In fact, no tax is absolutely neutral because it always affects the income or wealth of the taxpayer. But, taxes should be designed to affect people as little as possible who are producing wealth.
Efficiency is the use of resources in the most efficient way possible. Equity is the fair distribution of wealth produced.
For example, 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 in a different way. Some will study hard, stop going out with friends and stop doing other activities that demand a lot of time. This is done in order to study as much as possible to prepare and get the best result.
On the other hand, there will be another group of students who will strive less. This would involve continuing their normal life, without sacrificing too much time to prepare for the exam. Clearly, the results will be very different.
Efficiency in this example would be the student who studies hard and gets a good grade, while equity would be giving the same grade to the student who didn’t study as hard.
It’s important to note that there is a trade-off between efficiency and equity. Achieving one may come at the cost of the other. Therefore, it is important to find a balance between the two in order to achieve the best overall outcome.
