Economic Problem Related to Equity and Efficency

Q.No: 1
Discuss each of the following statements from the standpoints of equity and efficiency. (a) "Everyone in society should be guaranteed the best health care possible."
(b) "When workers are laid off, they should be able to collect unemployment benefits until they find a new job.." Answer (a) If everyone were guaranteed the best health care possible, much more of society's resources would be devoted to providing health care than is now the case. Would that be efficient? If you think that currently doctors form a monopoly and restrict health care to keep their incomes high, you might think efficiency would increase by providing more health care. But more likely, if the government mandated increased spending on health care, the economy would be less efficient because it would give people more health care than they would choose to pay for. From the point of view of equity, if poor people are less likely to have adequate health care, providing more health care would represent an improvement. Each person would have a more even slice of the economic pie, though the pie would consist of more health care and less of other goods. (b) When workers are laid off, equity considerations argue for the unemployment benefits system to provide them with some income until they can find new jobs. After all, no one plans to be laid off, so unemployment benefits are a form of insurance. But there's an efficiency problem: why work if you can get income for doing nothing? The economy isn't operating efficiently if people remain unemployed for a long time, and unemployment benefits encourage unemployment. Thus, there's a trade-off between equity and efficiency. The more generous are unemployment benefits, the less income is lost by an unemployed person, but the more that person is encouraged to remain unemployed. So greater equity reduces efficiency