The False Tradeoff Between Efficiency and Equity

This response was written by Haynes Goddard, a professor of economics.

On the issue of efficiency vs. equity tradeoffs, one needs to be
careful, as the distinction is only superficial, although it is true
that the profession perpetuates it. While it may come as a surprise,
even to economists, the connection between fairness and efficiency is a
lot closer than most treat it, and distinctions between the two not so
clear cut.

I give the following explanation to my students. First, I ask if anyone
in the class is currently employed. Always someone is. Then I ask this
individual if he or she is paid. Silly question of course, but I am
serious, and ask why they do not work for nothing. This conversation
eventually gets us to the question of opportunity costs, which of course
is the heart of efficiency analysis, but I conduct the entire discussion
in terms of fairness. That is, none of us who is not independently
wealthy would think of working permanently for nothing, as it would be
grossly unfair to be required to work without compensation.

Thus, at the heart of fairness is a requirement to be compensated for
one’s opportunity costs, which in this conversational context is
typically time taken from studies. To generalize, to ask that all
opportunity costs be paid by those who cause society to incur them on
their behalf lies at the core of fairness. But economists always present
this as an efficiency argument. To be sure, distributional questions are
also at the heart of fairness, but what this twist does is make clear
that the conflict is not efficiency vs fairness, but one kind of
fairness vs. another — for which there is no clear guide to decision
making, certainly not within economics.

However, one can say that the use of the net benefits or efficiency
criterion does provide a balancing off one person’s fair treatment with
that of another — prices paid vs. prices received. This decision rule
becomes quite attractive when all scarcities are properly priced, that
is, when there is a market for all scarce goods and services and all of
these markets work well. This explains the tenacity with which the
economics profession clings to competitive markets, because they can be
defended as fair (subject to the initial distribution of income, of
course ―the “other” definition of fairness). And this “market fairness”
is in fact widely recognized by the environmental community, except that
they call it the polluter pays principle.