Welfare Economics
Equity and efficiency

Efficient measures are often not implemented because of their potentially damaging effects on distribution, yet these distributional effects are scarcely studied in economics because of the idea that they are case-specific. In Discussion Paper No. 1218, Research Affiliate Isabel Correia shows that when the effect on efficiency can be obtained independently from the consideration of agent heterogeneity, it is possible to get the result that the effect on utility distribution is also independent of the distribution of characteristics between agents, and can be computed using only aggregate effects. Thus, distributional effects can be obtained without calculating the effect on each individual's utility. The only requirement is to know the change in the economy's equilibrium prices.

This result means that in a world without lump-sum transfers and agent heterogeneity, an expeditious rule is available to separate the class of Pareto-superior measures from the class of measures that, being efficient, are not Pareto-superior (without requiring knowledge about the characteristic distribution or the specific form of the social welfare function). The paper shows that these results apply when agents in one economy can be differentiated by different non-human wealth and/or by different labour efficiency levels. Examples of the type of policies for which these results are relevant are the abolition of income taxation, the reduction of inflation and international capital liberalization.

Efficiency and Equity: Is There a Trade-off?
Isabel H Correia

Discussion Paper No. 1218, July 1995 (IM)