ECON1002 Lecture Notes - Lecture 3: Diminishing Returns, Marginal Utility, Efficient-Market Hypothesis
Tutorial 3 -Market efficiency and equity
If society is unequal but everyone is paid proportionally to their contribution to the
collective pie, is this fair? Is this a just society?
Define relative equity, proportional equity and equality of opportunity (equity of
treatment)
What does perfect relative equity mean? Why do economists tend to think it would
be a bad thing?
If society’s institutions provide perfect equality of opportunity, will outcomes be
equal? Would such a society be just?
What does it mean to say that there is diminishing marginal returns to utility from
income? In what sense does this claim provide a simple argument for redistribution?
-The questions are intended to give people an intuition sense for the idea that perfect
equality is actually unfair, and that, conversely, everyone being paid their
-marginal product is also unfair. As such, policymakers will always face tough trade off
across relative and proportional equity.
-Proportional equity means getting what you deserve. If you contributed 50% of the
total pie then you should get a 50% share of the pie (you can of course then contribute
more out of charity). Relative equity means everyone being equal in the sense that if
there are ten of us we all get 10% of the pie – that is an equal share. Equality of
opportunity is about everyone starting the race is the same place—your performance in
the race depends on you not any “unfair” advantage that a particular runner had in the
race.
-Perfect relatively equity means that everyone has an equal share of the collective pie. It
is the communist ideal: from each according to their ability, to each according to their
need. 10 people, 10% of the pie each. Economists tend to think it would be a bad idea
because it would destroy most incentives people have to work harder. Work takes
effort, but this effort is not rewarded as any extra product you produce is given to
others. Now of course we have some altruistic sentiment, but it is an empirical fact that
people respond to private incentives. As such, perfect equity makes for a relatively
(very) small pie.
Perfect equality of opportunity would mean that people’s outcomes are purely a
function of their own effort (and perhaps luck). Note that this is a hypothetical. It is
impossible to realise in reality. For the most part, it is an uncontroversial goal, but it is
helpful to consider whether it is “ideal”. Luckier people, including people with better
genes, will inevitably end up ahead in such a society. As such, the society may have weak
relative equity. Is this a problem?
Document Summary
Define relative equity, proportional equity and equality of opportunity (equity of treatment) The questions are intended to give people an intuition sense for the idea that perfect equality is actually unfair, and that, conversely, everyone being paid their. As such, policymakers will always face tough trade off across relative and proportional equity. If you contributed 50% of the total pie then you should get a 50% share of the pie (you can of course then contribute more out of charity). Relative equity means everyone being equal in the sense that if there are ten of us we all get 10% of the pie that is an equal share. Equality of opportunity is about everyone starting the race is the same place your performance in the race depends on you not any unfair advantage that a particular runner had in the race. Perfect relatively equity means that everyone has an equal share of the collective pie.
