Can Equity and Efficiency Complement Each Other?
31 Pages Posted: 28 Feb 2002 Last revised: 7 Feb 2021
Date Written: February 2002
Economists tend to assume that redistributive transfers increase equity but cause a loss in efficiency, the so-called 'leaky bucket' effect. This paper explores situations where efficiency losses are small or where equity and efficiency might even complement each other. A simple model identifies key parameters that cause leaky buckets and which policy can affect. Three situations are discussed where the equity/efficiency tradeoff may be low: When transfers go to populations with no capacity to change their behavior; when transfers go to programs that limit efficiency losses through behavioral requirements; and when commodities are subsidized that function as long-term investments and create future income gains.
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