Espinoza (2007) highlights the debate around the feasibility of ‘equity’ and ‘equality’ in a society where the prime concern is efficiency in the allocation of resources rather than the issue of social justice. This essay proposes a definition for the term ‘efficient output’ in a free market, and identifies how such outputs may be distorted by market failures and impacted by state interventions. In particular, it examines how redistribution/reallocation of scarce resources are defined by governmental priorities and policies, including theoretical frameworks underpinned by libertarian, liberal, or collectivist perspectives. It examines how the State frequently seeks to intervene in the market by introducing policies and regulations aimed at achieving a degree of equity in the redistribution, either vertically or horizontally, of scarce resources on both the demand and supply side. It is argued that although theoretical perspectives vary on the extent to which the State should intervene and how, nonetheless State intervention is necessary in obtaining an equitable outcome.
Classic economic theory, LeGrand et al (2008) is based on the fundamental premise that when a supply curve intersects a demand curve, this intersection point defines the “point of equilibrium” i.e. the “price-output combination” (pg. 18) or natural balance between supply and demand in a free market. This point is deemed to determine the optimum efficient level of output in a free and perfectly competitive market (LeGrand et al, 2008). Furthermore, it is said that an efficient allocation of resources means that “..net social benefit cannot be increased by a reallocation of resources and/or a rearrangement of production” (LeGrand et al, 2008, pg. 10). In the real world of free market economies, ‘inputs’ are usually described broadly as factors of production, which would include in various measures and combinations of land, labour capital and enterprise. The basic demand and supply curve, whilst it can shift over time, usually has a self-regulating stabilising mechanism which irons out such changes in the diagram over time. However, there are a number of market imperfections which may give rise to a situation where maximum efficiency is not achievable in a ‘real life’, imperfect situation.
Examples of factors which can distort a free market, and thus give rise to an ‘imperfect’ market, would include the impact of monopolies, externalities, public goods and information failures. Market failures can be “…ameliorated by non-market institutions” (Stiglitz, 1989, pg. 197). An example of such a non-market institution which often seeks to actively intervene in a free market to ameliorate market imperfections and to ensure greater equity is the State. Classic economic free market theory, defines a ‘monopolistic situation’ as one where “..companies restrict production and keep costs high” (Cairney, 2011, pg. 146). For example, if a number of producers are producing/supplying the same good or service, competition between companies tends to keep prices low so that they are competitive. Conversely, if there is only one producer of a good or service, that producer may have the power to set the market price at a price they determine because they effectively have no competition, and therefore no need or incentive to keep prices competitive.
“Externalities” refer to the “..(often unintended) effects of the actions of one agent on another (positive or negative)” (Cairney, 2011, pg. 255). For example, tobacco companies produce cigarettes. When an individual inhales a lighted cigarette, this gives rise to the release of a mix of toxic chemicals which has been shown to be harmful to persons in the immediate vicinity who are not smoking. This is called a negative externality.
“Public goods” are defined as “..collective resources which are non-excludable (no one can be excluded from enjoying their benefits and non-rival (their use by one person does not diminish their value to another” (Cairney, 2011, pg. 134). To illustrate the point, it is virtually impossible that an individual could afford to pay for the construction of a major of public infrastructure which when built will constitute a major benefit to the public realm as a whole. e.g. a new motorway. However, that same individual is entitled to use a motorway once constructed and the value of the motorway to that one individual does not diminish the value/worth of that same asset to another.
“Information failures” can arise when actors in the marketplace do not have universal knowledge. Barr (2015) describes an information failure as when one side of the market is less informed than the other, thus individuals cannot make logical, rational or full informed decisions in their best interest.
Market failures imply that a market had failed to achieve “..results that are in the best interests of society as a whole..” (Marciano and Medema, 2015, pg. 1). In such circumstances, the state may choose to intervene in an efficient market in order to seek to achieve greater equity and balance.
The state may redistribute resources horizontally or vertically. Horizontal equity is “..the command that equals be treated equally” (Kaplow, 1989, pg. 139). One definition for ‘equality’ is the “equal treatment and equal access” (O’Brien, 2001, pg. 147) for individuals, as everyone is of “..equal worth and entitled to the same rights and protections” (Considine and Dukelow, 2009). An example of a universal entitlement in Ireland is that all women are entitled to Child Benefit irrespective of their financial or socioeconomic circumstances. Everybody has an equal entitlement to a universal benefit i.e. everyone is entitled to the same amount. It has also been argued in other research that inequalities can be equitable (Cappelen et al, 2014).
Vertical equity is “..the redistribution of income or consumption from rich to poor” (Barr, 2012, pg. 12). Many other benefits in Ireland, such as Rent Allowance, are ‘residual’ – i.e. subject to assessment. Means-testing means that only those most in need will qualify for additional financial support. Thus, residual payments are equitable in they discriminate positively in favour of the most needy and the better-off do not qualify. Research makes it clear that there are many differing perspectives of interpreting ‘equity’ in practice and how the welfare arm of the state redistributes scarce resources. In research terms, there is a recurring theme as regards to settling on the precise definitions and intended meanings of both ‘equity’ and ‘equality’. Both terms are frequently used interchangeably. In reality whilst these are closely related concepts, they are distinct and separate in meaning (Espinoza, 2007). Equity has been described as “social justice or fairness; it is an ethical concept, grounded in principles of distributive justice.” (Braveman and Gruskin, 2003, pg. 254). However, the concept of justice and defining the word ‘fair’ varies widely amongst users of the word, hence even agreeing upon a definition for the word is intrinsically problematic.
Research identified three main theoretical models by which a state may decide to redistribute resources in order to achieve an equitable outcome – libertarian, liberal, and collectivist. Libertarians focus on the individual free will and believe that the market is efficient, therefore state intervention should be limited. Libertarians are separated into two subgroups. The first subgroup are ’empirical’ libertarians who believe the state should not have the right to tax citizens and believe intervention “..will reduce welfare” (Barr, 2015, pg. 23). Barr (2015) also states that empirical libertarians believe the State’s distributional role should be “circumscribed” (pg. 39). The second subgroup are ‘natural right’ libertarians who believe that state intervention should be minimised to the defence of a person and their property (Barr, 2015, pg. 24),. Gibbard (1976) describes a natural right as “..a right one has independently of institutional arrangements.” (pg. 77), thus is could be argued that state intervention violates a person’s moral or natural rights by incurring tax. Barr (2015) states that natural right libertarians believes the State should have no role in distribution.
Liberals, the second model, also focus on individual freedoms and ‘personal autonomy’. Unlike libertarians, liberals hold the view that the State’s distributional role should aim to allow people to become “self-sufficient” (Kennedy, 2013, pg. 86). Barr (2015) states that although liberals believe that capitalism is more efficient than a centralist/communist society, capitalist ideology is flawed in terms of creating inequality; thus it is the responsibility of the state to provide equitable outcomes. Theories within liberalism include utilitarianism, Rawlsian and theories proposed by Sen. ‘Utilitarianism’ is based upon the legitimate distributional role of the State in the provision of goods and services aimed at maximising total happiness, welfare, or well-being to the greatest number of people (Barr, 2015, pg. 25). On the other hand, John Rawls posits that the legitimate role of the State should be maximising happiness that extends equally across society, “..unless the unequal distribution is to the advantage of the least well-off individual or group” (Barr, 2012, pg. 39). A third alternative used to examine how to the welfare state should redistribute resources was one proposed by Amartya Sen. The use of Sen’s capability theory was in contrast with “..neo-liberalism and utilitarian policy prescriptions” (Jacobson, 2016), as Sen criticised utilitarian and liberal theories for using utility as a measurement of happiness and ignoring a person’s capability. The capability approach “..is concerned with evaluating a person’s advantage in terms of his or her actual ability to achieve various valuable functionings as a part of living.” (Sen 1993, pg. 30).
The third model, collectivism, focuses on society as a whole rather than the individual. Collectivists believe that the state should have full control over the market as they believe the free market cannot provide equal and equitable outcomes to all social classes (Sharp et al, 2013). However, in the pursuit of equitable outcomes, there is a trade-off between equity and efficiency. An efficient outcome is not always equitable, therefore the State may intervene in the market in order to obtain an equitable outcome.
State intervention in the redistribution of resources is achieved through means such as regulation, taxation and subsidies (Malpezzi and Mayo, 1997). The State may regulate the ‘quality’ and/or ‘quantity’ of goods or services such as setting a minimum wage (Barr, 2012, pg. 50). The State may tax goods or services in order to reduce the demand, e.g. adding tax to the price of cigarettes, thus reducing the externality that is passive smoking. The State may also subsidise goods or services (Barr, 2012), such as providing a medical card to individuals below a certain income, allowing them to receive medical care with little or no cost to themselves. Another way whereby the State intervenes in the market is public provision (Post, Bronsoler and Salmon, 2017). State provision is when the State provides “government-funded” systems with little or no cost to the individual (LeGrand 2011, pg. 81), such as the healthcare or education system in Ireland.
In summary, an efficient output is obtained at the point of equilibrium in a free and perfectly competitive market. However, there are a number of factors which may affect the efficiency of a market which include monopolies, externalities, public goods and information failures. A State may choose to intervene and redistribute goods and services either horizontally, underpinned by equality, or vertically, underpinned by equity. However, what is said to be equitable varies amongst theorists. Theoretical models, by which a state may decide to redistribute resources in order to achieve an equitable outcome, include libertarian, liberal, and collectivist perspectives. Libertarians believe the market is efficient and state intervention should be limited. Liberals believe that the market is efficient but may create inequalities and that the State’s role is to intervene in such circumstances in order to allow individuals to become self-sufficient. Collectivists believe that the State should have full control over the market as the market cannot produce equitable outcomes. Such interventions include the regulation of the market, taxation, subsidies and public provision. LeGrand et al (2008) explain that the market has a natural balance between demand and supply, with a self-regulating stabilising mechanism. However, markets are often faced with factors that disrupt this balance and it is necessary for the state to intervene. The extent to which the State should intervene is disputed between theorists but the research identified the agreement amongst theorists that State intervention is indeed necessary, even if only minimal.