The Equity-Efficiency Tradeoff
It’s good to be efficient, there’s countless books on how to improve efficiency, both at a personal level and also in the corporate world. Efficiency is usually seen as a good thing. The problem is that efficiency is often a practice that can leave empathy and morality at the door. A good example of this is our fear of AI. It doesn’t take a genius to figure out that for robots to become as efficient as possible they need to outgrow us and do away with us as quickly as they can. After all, we’re difficult and frustrating to maintain. The point is, we’re not robots and our economies need to reflect that. Otherwise you have a massively efficient fiscal system that leaves no room for fairness. This is the equity-efficiency tradeoff .
Economic efficiency is best gained when an economy provides goods or services that also provide the highest benefit at the lowest cost. A great example of this is Amazon. The company, although not technically an economy in itself generates enough income to be classified as the economy of a small country. What Amazon does is give people what they want, usually within a day, at the best cost they can find. It’s hard to find anything more efficient than the Jeff Bezos machine. The problem with this is that Amazon threatens the fairness of the ecommerce system because the more efficient it gets the more it’s rivals struggle to compete.
So if you apply this model to a nation’s economy you can start to see why economists and policy makers are constantly having to balance the scales for what makes money but also what benefits society. Healthcare is another great example. This is very expensive for a government to pay for, so to mitigate this you can defer the responsibility to the public. This allows governments more money to make their economy more efficient, the rich can still pay for treatment and increase the efficiency of the economy but those with lower incomes suffer.
The most common way to redress the balance here is with taxation. Governments want entrepreneurs in their country to earn plenty of money and keep it in their home nation. This boosts the economy. But governments will often tax these successful, wealthy business people higher rates to spread funds to the population as a whole. This can often put off these wealth generators so this is why you’ll often see tax breaks to encourage them to stay and keep the fiscal equilibrium in balance, as well as greasing the economic wheels of that particular country.
The equity-efficiency balance is far from easy and differs from country to country with varying levels of fairness. Keeping everyone happy in an economic system is impossible as people value very different things but it’s the job of those people holding the purse strings to maintain as much efficiency as possible without compromising the fairness of citizens. What do you value in a fair economy? Let us know in the comments and remember to like this video and subscribe to equity economics to get notified of the latest videos, just like this one. Thanks for watching.

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