Equity refers to fairness, while equality refers to sameness. Equity aims to address unequal outcomes, even if they arise from equal treatment or opportunity. Competitive markets do not always result in equitable distributions, as people have different abilities and needs. Governments can promote equity through policies like progressive taxation, welfare spending on education and healthcare. However, redistribution reduces the incentive to work and causes some loss of economic efficiency. Overall, markets promote efficiency while governments aim to enhance equity through various programs and taxation systems.

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

2. 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

3. 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.

4. 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.

5. 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

6. Efficiency and Equity (c)
Andrew Tibbitt 2008
Slide 6
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

7. 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

8. 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

9. 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?

10. • 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

11. 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 income, health care, education and housing, and a
reasonable standard of living.

12. Deadweight Loss from Minimum Wage
• In the labour market, it is the firm who is the buyer.
• The total buyer surplus is the profit that firms obtain by hiring these workers;
• With no minimum wage (a), efficiency is maximised (total surplus), but is it equitable?
• With a minimum wage (b), equity is achieved but with a loss of efficiency, due loss of trade in
labour market.
• The higher wage leads to a reduction in employment.
• Fewer transactions occur, so the total surplus in the market is reduced.
• Causing deadweight loss from the minimum wage policy
• However more workers receive a higher wage

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
• Deadweight loss caused by inefficiency of taxation
• (2024–25 onwards): Changing the 32.5% tax rate to 30%, raising the upper threshold for the 30%
tax bracket from $120,000 to $200,000, removing the 37% tax bracket and raising the 45% lower
threshold from $180,000 to $200,000
Table 1: Comparable Tax Rates
1996-99 2004-05 2016-17 2022-23
Taxable income MTR Taxable income MTR Taxable income MTR Taxable income MTR
$0 – $5,400 0% $0 – $6,000 0% 0 – $18,200 0% 0 – $18,200 0%
$5,401– $20,700 20% $6,001– $21,600 17% $18,201 – $37,000 19% $18,201 – $45,000 19%
$20,701 –$38,000 34% $21,601– $58,000 30% $37,001 – $87,000 32.5% $45,001 – $120,000 32.5%
$38,001– $50,000 43% $58,001– $70,000 42% $87,001 – $180,000 37% $120,001 – $180,000 37%
$50,001 + 47% $70,001 + 47% $180,001 and over 45% $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)
Learning Objectives
To understand the concept of equality
To understand the concept of equity
Equity &
Equality