Equity

2. The concept of equity
• Equity is essentially fairness.
• What is fairness in regards to economics?
• Fairness in economics is about how societies production (or income) is
divided up amongst the population.
• There are two types of equity:
• Horizontal equity states that those with the same ability to earn should
pay the same tax rates.
• Vertical equity states that those who earn more should pay higher tax
rates.

3. The relationship between equity and efficiency
• Equity and efficiency are very different concepts, a simple way to
understand this is:
• Efficiency is concerned with increasing the economic pie.
• Equity is concerned with dividing up the economic pie into equal
slices.
• The two can be achieved in conjunction with each other when there
is government intervention, however without such intervention it is
virtually impossible to achieve the two together and there then has to
be a trade off. In the case that equity is chosen there is a deadweight
loss.

4. Example
• Equity has its place, an example of where it is useful is:
• In Australia water is priced way below its true value so that people can
afford access to it. This is because the government have capped the price.
This means that everyone can afford to access water so that they don’t die
of thirst. This leads to other issues though, which include:
The water market is extremely inefficient, as the market is capped and not
free.
There is a huge water shortage because people overconsume and waste
water due to its cheap cost.
Equity policies cause people to overconsume a huge range of goods and
services, including: hospitals, Centrelink, water (above), and many others.

5. Policy options to promote equity
• The main way in which equity is provided is through the taxation system in
which people who have higher incomes pay tax at a high rate, and those
with lower incomes are taxed at a lower rate, and depending on how low
there income is they may not pay tax at all. This money is then used by the
government to give or subsidise particular goods or services such as:
• Health care
• Education
• Sanitation
• Housing
• Money handouts
• Etc.