Efficiency And Equity: A Structural Perspective

Economists evaluating policies frequently split the measurement of effects into two elements: efficiency, and the distribution of income. Traditional economic theory has focused primarily upon efficiency, under the assumption that efficiency alone avoids subjective judgments. Considerations of distribution, based on equity and involving subjectivity, are eschewed because of their normative nature. Efficiency is regarded as an objective function, as a mere description of observable reality which can be scientifically tested. It is perceived as existing in and of itself, unaffected by subjective sensibilities. Equity, in contrast, "has to do with justified or justifiable distributions of rights and privileges among people. An equitable distribution need not give everyone the same rights and privileges but it must be justified in some sense-legally, morally, by custom, by practicality or on some other basis." There are two perspectives on the relationship of efficiency and equity. One believes there is a tradeoff, while the other believes that any such tradeoff, if it exists, is too complex to discuss so haphazardly. Many economists in the United States believe that efficiency and equity are mutually exclusive, where increases in one are bought only at the expense of the other. The second view towards efficiency and equity believes that efficiency and equity are mutually determined. This paper argues that the second perspective is more accurate. Given the complexities and the normative nature of both efficiency and equity, it further argues that standard economic analysis must be changed to explicitly incorporate value judgments.