Efficiency and Equity

• In economics, we are often concerned with how well the resources available (land, labor, capital, etc.) are used. The better the basic economic resources are used the more efficient the economy. A perfectly competitive market through the workings of supply and demand leads, in general, to the most efficient use of economic resources. (There a number of instances where the market does not lead to the most efficient use of resources; imperfect competition, imperfect information, and public-goods.  See an introductory economic textbook such as Joseph Stiglitz and Carl Wash’s Economics 4th Edition Chapter 11.)

• However, the market does not guarantee equity, or in other words equal distribution of income. Often the most efficient outcome is not the most equitable, leading to large disparities between the rich and poor in a given country. 

• These inequalities between the rich and the poor often cause politicians to devise ways to redistribute wealth. They take some from the rich in the form of taxes and give it to the poor in the form of welfare payments. This is one of the features of the welfare state in Europe. 

• The Gini coefficient is a popular measure of inequality. A Gini coefficient close to zero (more toward green and then yellow on the map) means that there is very little inequality in that country. A Gini coefficient closer to one (more toward blue and then purple on the map) means there is a very large gap between rich and poor. In the following map note that European countries are more equitable than the US.