Market Efficiency and Equity Issues

Jim Whitney

Economics 101

Market Efficiency and Equity Issues

Friedmans. "The Power of the Market"

(1)

What are the main functions the price system (market system) performs in organizing economic activity?

(2)

List four types of activities that "even the Friedmans" feel are appropriate for the government.

1.	3.
2.	4.

2.	Blinder. "Economic Policy Can Be Hard-Headed--and Soft-Hearted"

	(1)	What is the "Principle of Efficiency"?
	(2)	What is the "Principle of Equity"?

(3)

Complete the following table illustrating Blinder's policy guidelines by choosing from the following policy options: (1) Do it; (2) Don't do it; (3) Debate it.

Policy impact...		(1) on efficiency
		Raises efficiency	Lowers efficiency
(2) on equity	favors poor	a.	c.
	favors rich	b.	d.

(4)

Indicate which cell of the table you would use to classify each of the following, aiming to assign one event to each cell.

	Policy/ruling:	Cell
1.	Increase income-tax rates on high-income taxpayers
2.	Reduce labor market discrimination against women and workers of color
3.	Repeal the Sherman Act which presently makes domestic price-fixing cartels illegal
4.	Reduce barriers to free labor migration between the U.S. and Mexico

The "Leaky Bucket" Experiment: Suppose we are considering taking a dollar from someone in the richest 30% of the population and transferring it to someone in the poorest 40% of the population. Consider the maximum amount of "leakage" you would allow and still favor the transfer. (The "leakage" can be thought of as an efficiency loss.) For example, if you answer 5%, you mean you would still make the transfer if only 95 cents of the dollar reached the poor, but not if only 94 cents reached the poor.

Circle only one percentage: The maximum I would allow to "leak out" in making the transfer is:

0%	5%	10%	25%	50%	75%	99%
<--efficiency matters most . . . . . equity matters most-->