Comment on the following: "The second welfare theorem says that we can get any efficient allocation to be an equilibrium allocation. If endowments are inequitably distributed in an economy, we can therefore redistribute among people and still get an efficient outcome. As a result, there is no policy trade-off between equity and efficiency."

Question

What will be an ideal response?

Answer 1

The statement accurately summarizes the second welfare theorem -- except that it neglects to state that the redistribution has to be of the "lump sum" kind in order for no efficiency loss to emerge from redistributive taxation. Since governments typically cannot redistribute in a lump sum way, the trade-off between equity and efficiency does emerge if we consider the initial distribution of endowments to be inequitable.