Equity and Efficiency versus Freedom and Fairness: An Inherent Conflict

Abstract

In the presence of very substantial increasing returns, freedom (such as in the choice of jobs or the place of residency) and fairness (horizontal equity) may be inconsistent with the attainment of (vertical) equity (interpersonal equalization of marginal welfare of income) and/or efficiency, even abstracting from familiar factors (incentive effects, administrative costs) accounting for the equity-efficiency trade-off. The imposition of congestion taxes on urban residency or the offer of high salaries to attract volunteer soldiers may achieve an efficient division of the population consistent with freedom and fairness but is unlikely to coincide with the equalization of the marginal welfare of income. This conflict may partly explain the urban–rural segregation in China and the prevalence of conscription in many countries. Needless to say, it does not justify most illiberal policies.