Lessons from the Old Masters on Assessing Equity and Efficiency: A Primer for Fiscal Policymakers

Abstract

How can a society's well-being be measured to include not only average incomes but alsotheir distribution? How can the effects of policies be assessed by considering both equity andefficiency? This primer outlines the seminal contributions of influential economists of thepast, including Arthur Okun, who developed a simple method to elicit people's preferencesregarding redistribution, and Anthony Atkinson, who showed how equity and efficiency canbe measured simultaneously and summarized in a single, intuitive index expressed inmonetary units (such as dollars). These methods are applied to recent data to gauge howcountries fare when both mean incomes and their distribution are considered together, and toa hypothetical tax-and-transfer scheme assessed through a general equilibrium model forhousehold-level data.

Keywords: equality and efficiency, fiscal redistribution, General, Externalities

JEL Classification: I30, D62, H20