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Trade-Off Between Equity and Efficiency: Government Revenue and Expenditure

  • Date Submitted: 04/19/2012 03:23 PM
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Equity and Efficiency:
Government Revenues and Expenditures of OECD Countries

Government policy for social equity and economic efficiency has been a long-standing subject of heated political debates as it is believed among economists that that there is a trade-off between efficiency and the pursuit of greater equality, which is known as the equity-efficiency trade-off.
Altruist people benefit from witnessing a relief of poverty and distribution of wealth benefits both the rich and the poor, resulting Pareto improvement. The redistribution also has other external benefits to the society such as a decline in crime rate. These show that the pursuit of equity can increase efficiency as well. In addition, the government intervention may prevent market failures under market system due to asymmetric information and restrictive access to capital market for low-income people.
However, if a government which values equity introduces safety net such as unemployment benefit and guarantees everyone a certain level of income, this may encourage people on low income to quit working at all, inducing the total size of the economy to shrink. Therefore, the safety net should proceed only if the gain to society outweighs the cost of fall in output. There are many different value judgments on what is equitable and thus, the level of the government interventions, which normally lies between two extremes, centrally planned socialism and completely laissez-faire capitalism, vary across countries.
*National accounts summary (in millions of national currency – esds OECD data
Poverty is one of the main government concerns and different types of benefits are provided for causes of the poverty, such as unemployment, illness and old age. Private insurance can be provided in the market but they are vulnerable to market failures due to the lack of information, and equity concerns.
However, the government intervention may give rise to moral hazards. For instance, recipients of...


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