Home » Eng Accounting » E » Efficiency-equity trade-off

Efficiency-equity trade-off

The observation that policies designed to achieve economic efficiency often have detrimental effects on distributional equity. For example, it is efficient to tax commodities with a low elasticity of demand at a high rate, and those with a high elasticity at a low rate. If commodities have a low elasticity because they are necessities the tax burden will fall relatively heavily upon low-income groups for whom necessities are a large part of the budget. If the policy is changed to improve the distributional effects then it will be less efficient. The optimal trade-off between efficiency and equity can be deteraiined using a social welfare function.

Reference: Oxford Press Dictonary of Economics, 5th edt.