Equity refers to fairness, while equality refers to sameness. An equitable distribution of resources gives all people access to basic needs and a satisfactory standard of living, regardless of individual efforts or abilities. Equitable tax systems deliver both horizontal equity, where those with equal ability to pay taxes do so equally, and vertical equity, where those with greater ability pay more. While markets can allocate resources efficiently, they do not always distribute outcomes fairly. Governments may pursue redistribution policies to improve equity but these could damage incentives to work.

2. Equity &
Equality
Learning Objectives
To understand the concept of equality
To understand the concept of equity

3. EQUITY and EFFICIENCY
• By the end of this topic you will be able to
Distinguish between equity and equality
Explain why the free market solution is not
always equitable
Identify ways they government can achieve
equity for the state
Discuss equity efficiency trade-off

4. Equality = Equal or the same
• Based on the fact that
– Different people have the same level of economic
resources and income available to them.
• Having absolute equality of income would
mean that one persons income would be
exactly the same as another persons income.

5. Equality = Same
• Incomes (and wealth) are equal or
unequal for varying reasons
• The state can alter the market distribution
of income and wealth to make it more
equal if it believes the market outcome is
unfair
• Equality = A measure of how equal people are
in terms of income distribution or opportunities.

6. Equality – the situation where goods and services
in a society are distributed equally
The benefits of equality:
•Improves social cohesion – less difference
•Improves health – greater access
•Can encourage economic growth – less saving
Issues created by equality:
•Lack of incentive to work harder; what’s the point?
•Profit motive drives the economy
•International competitiveness: in highly re-distributive
economies (high taxes and benefits) may act as an
uncompetitive constraint in the economy

7. Efficiency and Equity (c)
Andrew Tibbitt 2008
Slide 7
Efficiency and equity
1. Efficiency – is the economy getting the most of out its scarce
resources (or are they being wasted)?
1. Technical efficiency – is production being done at
lowest unit cost?
2. Allocative efficiency – are resources being used to
make products that people want?
2. Equity – how fair is the distribution of products between
different members of society?
1. Horizontal equity – no discrimination between people
whose economic characteristics and performance are
equal
2. Vertical equity – different treatment of different people in
order to reduce the differences between people

8. Equity
Equity – the concept of ‘fairness’
Difference between efficiency and equity
Efficiency – increasing the size of the economic pie
Equity – dividing up the economic pie in equal portions
Do competitive markets result in fair distribution?
A fair distribution of income would result in all people in society
able to satisfy their basic needs and wants and enjoy a
satisfactory standard of living.
There can be no universal definition of equity:
•What some will consider fair reward for work done, others may
consider unfair
•Refers to a “good” distribution of welfare across society
The significance of equity:
•The concept of fairness will be part of the economic policy
making process
•Many economic policies will aim to improve equity

9. Types of Equity
Equity applies in the construction of tax systems:
Vertical Equity - people with a greater ability to pay taxes should
pay more (poor v. rich) (Robin Hood approach)
Examples. Income tax, welfare spending, health care, education,
State GST allocation.
Could possibly impact on peoples incentive to work longer hours
or even to work.
Could cause the pie to shrink
What is better - an increasing pie divided into unequal shares,
Or a smaller pie divided into equal shares

10. Equity and Equality
• Even if there were complete equality of income this
would not be considered equitable because it would not
reflect the efforts or abilities of the individual.
• Would it be fair that regardless of how hard you worked
or applied yourself the outcomes were the same?
• Why work hard and stay in school if you are likely to be
as well off as a person who drops out of school at the
age of 14?

11. • Horizontal Equity - people with a similar ability to pay taxes
should pay the same or similar amounts
• Provide people with the same opportunity to succeed
• Example, (equal opportunity legislation) people should be free
to choose their own pathway in life,
• Choose how much education they undertake, choose their
own occupation (as long as its lawful)
• Key provision in market economy is private property rights
• Welfare and income assistance
• Truly equitable tax systems will deliver horizontal and vertical
equity.
• E.g. income tax has both horizontal and vertical equity.
Types of Equity

12. Efficiency and Equity
• When an economy achieves allocative efficiency it may
not represent an equitable outcome for people.
• Some people are on very low incomes whose standard
of incomes are below what is considered fair.
• An equitable situation would be where every Australian
has access to adequate health care, education and
housing, and a reasonable standard of living.

13. Equity Vs Efficiency
• A market economic system leads to income inequality.
• Those who own resources that are highly demanded yet
in short supply will be earning very high incomes.
• Those who have very few resources that are demanded
by the market will have very low levels of income.
• Market outcomes are unequal

14. Redistribution
Using the tax and benefit system to transfer wealth from the
wealthy to the poor.
Improves equity:
•Raises consumption by the poor
Issues:
•May damage the incentive to work
Table 1: Comparable Tax Rates
1996-99 2004-05 2016-17
Taxable income MTR Taxable income MTR Taxable income MTR
$0 – $5,400 0% $0 – $6,000 0% 0 – $18,200 0%
$5,401– $20,700 20% $6,001– $21,600 17% $18,201 – $37,000 19%
$20,701 –$38,000 34% $21,601– $58,000 30% $37,001 – $87,000 32.5%
$38,001– $50,000 43% $58,001– $70,000 42% $87,001 – $180,000 37%
$50,001 + 47% $70,001 + 47% $180,001 and over 45%

15. Possible Essay question
Discuss the benefits and constraints of using the tax system to create
a more equitable society.
What else could make society more equitable?
Possible essay question:
Explain the concept of equity. How is it demonstrated in the economy?
(4 marks)
Explain what happens to efficiency when equity is targeted by the government
(6 marks)Jan.
2009)Get Josh to lead a discussion on an essay plan!
Learning Objectives
To understand the concept of equality
To understand the concept of equity
Equity &
Equality