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Equity and Efficiency Tradeoff

The argument in favor of free markets that is most common among economists is based on efficiency. Under certain conditions (such as perfect information, the absence of externalities, etc.), a competitive market outcome is efficient in the sense that the economy will automatically equilibrate at a point at which no one can be made better off without making someone else worse off in terms of utility, which typically depends on the amount of goods consumed. The argument further states that in a competitive free market system any attempt to change outcomes will be inefficient. This is the origin of the equity-efficiency tradeoff concept. For example, an attempt at increasing equity by introducing rent controls will introduce distortions into the economy resulting in lessened supply, lowered ...

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