efficiency–equity trade-off

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The observation that policies designed to achieve economic efficiency often have detrimental effects on distribution. For example, it is efficient to tax commodities with a low elasticity of demand at a high rate, and those with a high elasticity at a low rate. If commodities have a low elasticity because they are necessities the tax burden will fall relatively heavily upon low‐income groups for whom necessities are a large part of the budget. If the policy is changed to improve the distributional effects then it will be less efficient.

Subjects: Economics.

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