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Equality versus efficiency

If the government lowers income taxes on Americans in the top one percent of earners, while decreasing welfare payments to citizens with incomes below the federal poverty threshold, the most likely result is____________  in efficiency and_______________   in equality in the United States.

Match each definition to its appropriate concept.

DefinitionEfficiencyEquality
When economic benefits are distributed uniformly across society
When a society gets the most it can from its scarce resources

Answer:

an increase in efficiency

a decrease in equality

Equality versus efficiency
Equality versus efficiency

When governments design policies aimed at increasing equality, society must also be prepared to accept a decrease in efficiency.

For example, if the U.S. government decreases income taxes on the wealthiest Americans, it gives them an incentive to work harder to produce goods and services, since they will keep a higher percentage of what they earn. The result is more goods and services produced for society overall. In other words, the economic pie would become larger and the economy would be more efficient.

At the same time, however, a lower tax rate on wealthy Americans, with a corresponding decrease in transfer payments to poorer Americans, can decrease equality since the income gap between wealthy and poor Americans will have gotten larger.

Efficiency means that society is utilizing its scarce resources to attain the maximum possible benefits. Equality, on the other hand, means that those benefits are distributed evenly among all members of society. Efficiency can be thought of as the size of the economic pie, while equality describes how that economic pie is divided into individual slices.

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