Thoughts on Equity and Allocative Effiency in Economics

My friend here has written a nice article on economics.

http://datinker.com/blog/2015/08/04/trade-off-between-equity-and-efficiency/

I would like to share some of my thoughts regarding the subject of "equity and efficiency".

It occurs to me that the interpretations of "information" in the two mentioned thought experiments are not necessarily the same. Nevertheless, I agree with her conclusion that perfect equity and allocative efficiency cannot exist.
I found the idea of equity debatable. When we talk about equity, we are talking about individual welfare. It seems that the "original position" thought experiment tries to prevent people from making effective judgement of their own position and thereby force them to arrive at a maximin decision under the assumption that rational people are risk aversive. However, will that necessarily bring to the society equity? People still enjoy different welfare because each of them has different endowment. We can at best conclude that those least advantaged are taken care of. I would say that, so long as members of the society are different in terms of their natural talents or possession, equity can never be achieved regardless of whether allocative efficiency is achievable. Moreover, the definition of equity is itself unclear. Would equal welfare entail equity or meritocracy?
Then is the idea of perfect competition. This idea originated from market analysis in microeconomics. Perfect information refers to each party's perfect knowledge of different variables in a particular market such as prices. As such, perfect information will lead to effective decision making that creates maximum utility for the society as a whole. Therefore, "information" referred to here is different from that in the "original position" thought experiment.
Let us now try to generalize the idea of "perfect information" to a individual level. Assume that each individual is equivalent to a firm in a competitive market. Everyone of us tries to outplay the rest and achieve maximum utility for our own. If that's the case, perfect information would refer to knowledge about one's own particular circumstances (including talents, social status and conception of good) as stated in the "original position" thought experiment. The argument will then follow that "ignorance" and "perfect information" will contradict to give rise to the impossibility of equity and allocative efficiency to coexist.This is because ignorance will discourage comparison while perfect information encourages it.

Much said, I am know thinking about whether perfect information is indeed a necessary condition for allocative efficiency....I you have any thoughts, feel free to comment.

Comments

  1. 1) The definition of equity is indeed unclear in my essay. Since I used the Rawls' thought experiment, I was actually taking his view of equity (egalitarianism), which includes three principles: the equal basic liberty principle, the equality of opportunity principle, the difference principle (take care of least advantaged)... Of course, Rawls' view can be challenged and revised, but I am thinking that regardless the definition of equity, certain degree of ignorance has to be there (policy-makers have to pay less attention to, if not ignore, their own status and talents) to minimise bias and selfishness.
    2) i guess, perfect information is necessary for efficiency? again, this depends on our definition of the terms.

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