Explain the difference between economic efficiency and economic equity as principles that justify government regulation of the economy.

Question

What will be an ideal response?

Answer 1

An economy is a system of production and consumption of goods and services allocated through exchange. Economic efficiency results when the output of goods and services is the highest possible given the amount of input (such as labor and material) that was used to produce them. Economic equity occurs when an economic transaction is fair to each party. A transaction can be considered fair if each party enters into it freely and ethically. These principles can be the basis of government regulation. Efficiency is desirable but does not always occur naturally. Government may intervene when necessary to enhance efficiency, as in the case of monopolistic competition in which a firm's domination of the market enables it to produce and sell goods inefficiently. Government may also intervene to enhance equity. For example, in the case of a prescription drug company where the consumer is not in a position to determine whether a firm's claims about the drug's safety are valid, society must therefore rely upon government regulations. Laws that prevent monopolistic practices or impose drug-safety standards on pharmaceutical firms are examples of regulation for purposes of efficiency and equity respectively.