Thursday, November 16, 2006

Efficiency verses Equity: Often in tension

The assessment set for my undergraduates asks them to imagine that they must advise the government on a number of different possible environmental policies (taxes, permits, subsidies etc.) not only in terms of efficiency but also in terms of equity (fairness).

This paragraph is from an excellent article "What We Learn When We Learn About Economics, by Christopher Hayes, These Times, November 2006".

A must read for any Economics student this story investigates the experience of studying neoclassical economics 101 at Chicago. A great read.

Back to efficiency and equity:
His [Alan Sanderson's] second lecture begins with a thought experiment. Noting that there are only 26 spots left in the class for the 52 students who would still like to enroll, he asks, “How should we figure out who gets to go into the class?” The students—eager, studious and serious—shoot their hands up and offer a variety of ideas: Seniority? First-come, first-serve? Ask prospective students to write an essay? It takes about a minute for a confident young man to give the answer Sanderson’s looking for: “auction by price.”

“As a reasonable indication of how much you want something, how much you’re willing to pay is a pretty good means of measuring,” Sanderson says. “A lot of things in economics will turn in one way or another on price. Price has a lot going for it as a generalized expression of commitment. ....”

This makes sense, but I’m uneasy. Wouldn’t giving a place in class to the highest bidder result in the rich students getting in and the financial-aid kids being left out? And since people don’t have equal amounts of money to spend, how good a measure of desire is price in this situation?

“Random and first-come have the benefit of being fair,” Sanderson says, anticipating the objection. “There’s an interesting dichotomy of fair vs. efficient.” But, Sanderson asks, what, really, is fair? If we think some kind of random lottery drawing was a fair way of getting into the class, would that be a fair way of awarding grades? “Obviously not!,” I think. Why? Sanderson lets us mull that over, but the answer floats up immediately: because I work hard for my grades and I deserve them....

“We’re trying to balance these things out,” Sanderson continues. “What’s efficient? What’s fair? Often they are in tension.”

Hat-tip Economist's View.

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