Equity-efficiency trade-off:

The problem of just distribution, along with that of efficiency, is an essential part  of  the  broader problem  of optimal resource use,  which  involves  two issues. The first is to secure efficient satisfaction  of demands that arise from a given  state of distribution. Defined  in  terms  of  Pareto efficiency, the proposition that there is a welfare  gain when  the  position  of any one individual  is  improved  without hurting that  of  another-this objective  is generally accepted as a policy  goal. Only jealousy  is  ruled  out thereby. The second  issue  is how  to secure a state of just  or  fair distribution. Since there exists an efficient solution corresponding to each and  every state of welfare distribution, a question remains: which state should be chosen as equitable or
just? Here the concept  of  Pareto efficiency helps little.  The  problem  of distribution is  one  of  evaluating a change in  which  someone gains while someone else loses.

The  distribution of income  as determined  in  the market depends on  factor endowments and prices, which  the services of these factors will  fetch. This process  has  important bearing  on  efficient resource  use,  but it  does  not constitute a theory of  distributive justice. The distribution as determined by factor incomes need not  coincide with what  is considered socially desirable,
thus calling for adjustment by  fiscal and other policy measures. Various approaches to distributive justice have been distinguished and their implications for the distribution of  income have been  considered. First, the Endowment-based  View,  which sanctions that sanction the distribution  of income  as  determined by  factor ownership and  returns. Second, Utilitarian

View  that  calls  for  a distribution  of  welfare  so  as to maximise the total satisfaction. An  equal  distribution  of  income  is  required  if individuals are assumed to have similar utility  functions. Third, Egalitarian View  according to which would  distribute  income is to equalize the welfare position of all individuals so as to maximise that  of  the lowest.  Moreover, equity considerations may be  applied across generations  as  well  as  across individuals.

However, the issue before the practical policy  is  not  so much on  how  to establish a  fair  society and its de  novo state of distribution, but  to  consider whether  and how  to address the  problem  of  redistribution. The  question, therefore, is  to  what extent and  how  the existing state  of  distribution,  as determined  by  the  market  and prevailing  social institutions, needs to be amended. To  some extent, this may be  accomplished by  way  of  voluntary actions of  the members but  such  transfers carry minor weight  as compared with  policies of redistribution decided upon  by  the  process of budget. Such policies will then be met by  the responses of individuals who stand to  lose or gain in the process. This may  in  turn  affects the size of the pie available for redistribution and imposes costs, which must be  allowed for. Here comes the issue of eficiency-equity trade-off.

Redistribution involves costs as well as benefits, and both must be considered in policy making. Policies to redistribute, to begin with, can shrink the size of the pie available for distribution. This is shown here with regard to effects on labor supply, but similar problems arise with regard to saving, investment and economic growth.