Economic Efficiency and Equity
Economic efficiency is the process by which resources in a particular state are allocated optimally to individuals while ensuring that waste of resources is minimized. Therefore, in an economy whereby the resources are efficient, they must be distributed equally so that no harm can be caused to other people in terms of unequal distribution of resources (Dobzinski, Nisan and Oren). Additionally, concerning the production of goods and services, goods and services are produced as the lowest cost to lower the cost of production. Moreover, for a country to efficiently allocate resources, it must acquire a large amount of output from its limited resources. On the other hand, when we talk of equity in wealth distribution, a country must distribute its economic resources, equally and fairly among its citizens (Dobzinski, Nisan and Oren).
Driving Factor for Allocative Efficiency
Furthermore, allocative efficiency can be driven by several factors in an economy. One of these factors includes the existence equality between marginal utility and the marginal cost of goods. When marginal cost is equal to marginal utility, allocative efficiency is realized.
According to the graph above, when the output is at 110, the corresponding marginal cost is at $17. However, the price of the willing buyers is at $7. Therefore, in this case, the output is 110 and the marginal cost is at $17 but the buyers are willing to pay $7. In economic sense, the marginal cost which is $17 is greater than the marginal budget of the buyers resulting in overconsumption (Krugman). Therefore, there is over-production in the country resulting in allocative inefficiency.
On the other hand, considering the graph above, the output is at 40 while the marginal cost is at $6. However, consumers are willing to pay $15. The price reflects the marginal utility of a product and it is greater than the marginal cost. This suggest that there is under-consumption of resources hence there is allocative inefficiency in the country. For that reason, the allocative efficiency will occur at $11, where the marginal cost is equal to marginal utility, i.e. MC=MU (Krugman).
Furthermore, the second driving factor for allocative is the existence of perfect competition.
According to the graphs above, we can deduce whether there is allocative efficiency on not. For instance, the firms which are under perfect competition are likely to produce at allocative efficient level since at output, Q1, the Price, P is equal to marginal cost, MC. The presence of a non-monopolistic business environment also acts as a driving factor in efficient allocation of resources. Therefore, the absence of monopolies can act as a barrier to the increase in price above the marginal cost of production and hence promoting allocative inefficiency (Krugman).
Policies of improving end-result equity.
End-result-equity can be improved in different ways. For instance, it can be improved by increasing the minimum wage. According to research, individuals who earn higher wages from the lowest-paid workers are likely to help people indulged in poverty and also increase the general real income of a country. Moreover, another benefit of minimum wages is that, it does not lower the economic growth or hurt the employment in a country. Furthermore, another way of improving the end-result equity is to expand the earned income tax. When the earned income tax is expanded, many families will be lifted above the poverty level annually. By increasing the earned income tax, many individuals will be pulled out of poverty by giving more economic support to the poor families who are working to earn a living (Aitken, Harrison and Lipsey).
Additionally, end-result equity can be improved by building assets to the working families. This can be done in several ways. For instance, banking institutions can enact policies that promote higher rates of savings while lowering the costs to build assets for the middle and working class, thus providing better economic security for both working and middle-class families. Moreover, new programs should be initiated which can automatically enroll workers who are entitled to retirement plans, as well as offering savings credit for the saving accounts of the retired individuals. These programs are essential since they can help lower-income families build assets and wealth. Also, there should be access to low-cost financial services to these families as well as homeownership which can be used to build assets and wealth (Aitken, Harrison and Lipsey).
Moreover, end-result equity can be improved by investing in education. In most instances, education is used as a major determinant of income equality in many countries. For instance, existence of differences in education levels is highly contributing to increased and persistent inequality in many nations (Dobzinski, Nisan and Oren). Therefore, when the government increases investment in education sector, as early as childhood education, there is a likelihood increase in economic mobility in the country which will in turn increase the country’s productivity and reduce inequality.
Also, making tax code highly progressive is another way of improving the end-result equity. In many instances, the tax rate for the senior people on government or rather wealthy people have been declining while their wealth and income are increasingly rapidly. The government therefore needs to adjust the capital gains tax rates in order for them to be on the same level and line with the income tax rates. Additionally, savings incentives structured should be used to give equal benefits for the low-income families since it is refundable tax credit which treats every saved dollar equally (Schnitzer).
Consequently, there should be an end to residential segregation in order to improve end-result equity. For example, the presence of a high level of residential segregation within a particular region will result in a reduced level of upward mobility of individuals in that particular region. Moreover, when there is income segregation, there will be an increase in the isolation of low-income individuals, which will result in a reduced level of mobility (Dobzinski, Nisan and Oren). Therefore, in order to improve end-result equity, there must be the elimination of residential segregation by income as well as race in order to increase the economic mobility for all the citizens in the country.
Economic Efficiency and Equity in Sweden and Venezuela
As earlier discussed, economic efficiency is the process by which resources in a particular state are allocated optimally to individuals while ensuring that waste of resources is minimized, on the other hand, when we talk of equity in wealth distribution, a country must distribute its economic resources, equally and fairly among its citizens, different countries have different economic efficiency and equity (Weisbrot and Sandoval). Therefore, countries with successful economic growth recognize the importance of equality in resource distribution and efficient allocation of wealth. These countries thrive to ensure that all their resources are allocated to serve each member of the country in the best way while ensuring that nothing or very little is wasted. This has resulted in lower unemployment rates, reduced poverty levels, and higher living standards among the people of such countries.
Sweden
Sweden is one of the countries with a competitive mixed economy which features a generous collective welfare of the citizens and the state, financed by the income tax system which contributes to an even distribution of income in the country. According to Schnitzer, "Sweden has achieved a high standard of living under a mixed system of high-tech capitalism and extensive welfare benefits. Approximately 90% of all resources and companies are privately owned, with a minority of 5% owned by the state and another 5% operating as either consumer or producer cooperatives."
Furthermore, Sweden is one of the countries in the European Union whose economy has become much more efficient and the inequality has been kept low. As a result, Sweden has grown to a vibrant modern economy from a stagnant benefit-based country. Moreover, the rate of unemployment and poverty have been lower compared to other countries (Westlund). Therefore, the success of the economy of Sweden has been achieved by transmissions in the economic sector. Furthermore, comparing the wage disparity of Sweden with other countries, the wage disparity of Sweden has been narrow compared to Anglo-Saxon countries as a result of the presence of "centralized bargaining between unions and employers that sets minimum wages in different sectors" (Schnitzer). Therefore, this has led to equality which has reduced the level of poverty in the country.
Furthermore, the new tax model in Sweden has been beneficial since it ensures the retention of many services that ensured a reduction in taxes and transfers compared to the old welfare model in which individuals were paying high tax rates and get many services and huge transfers. Additionally, Sweden's government ensured that many tax policies are eliminated, such as the inheritance tax in 2005 and that many taxes were cut on low-skilled labor. Instead, the country ensured that low-skilled workers were given earned income tax credit incentives that made a big change in income (Schnitzer). As a result of these tax changes, there was an increase in capital income in the top income scale in Sweden.
Moreover, several other innovations such as credit for hiring household helps were initiated to increase the demand for low-wage workers. Also, their union membership charges no longer qualified for tax relief in Sweden. There has been an increase in job advertisement on billboards as the Stockholm’s suburban railway stations for low-wage workers which has reduced income inequality. The government has lowered the taxes and fewer benefits provided to encourage the citizens of Sweden to work (Schnitzer). When many of the citizens get jobs, they increase the economic growth, thus keeping inequality low.
In Sweden, the government spends funds and invests in early childhood education, training, and job searching. According to Schnitzer, "more than 70% of the children of the poorest fifth of Swedes are in state-financed child-care and education schemes, compared with fewer than 30% in America. Many schools are now independently run, and in health care private management is a growing trend." These steps have considerably boosted efficient allocation of wealth and hence economic growth.
Venezuela
According to Aitken, Harrison and Lipsey, "Venezuela is a federal republic on the northern coast of South America, Venezuela's economic freedom score is 25.2, making its economy the 179th freest in the 2018 Index." However, the overall score of the country has decreased by a range of 1.8 as a result of a decrease in business freedom, monetary freedom, and government integrity indicators. Most of the economic issues experienced in this country result from unequal distribution of resources and inefficient allocation of wealth.
Furthermore, poverty levels are high and the rate of unemployment is high, leading to poor living standards. This state is largely contributed by the poor economic policies instituted by the government. Also, the tax structure is such that the low-income people suffer from heavy deductions. This aspect of economic inequity has kept poverty at an increasing rate (Aitken, Harrison and Lipsey).
Venezuelan government has failed to increase the wages of low-paid workers. This is contributed by the poor established bargaining unions that should help in setting minimum wages for employers in different sectors (Aitken, Harrison and Lipsey). Therefore, the economy is characterized by the existence of a wide economic gap between the wealthy and the poor. As a result, the rich continue earning unnecessary big wages while the poor receive very little wages hence inequality that has led to increased poverty.
The government has also failed to promote the efficient allocation of wealth since it has not considered investing more funds in the provision of free education and training. Education has therefore become very expensive, especially for the poor who cannot afford good schools for their children. Moreover, provision of private services in the education and health sector (Aitken, Harrison and Lipsey). This is an aspect of inefficient allocation of wealth that has promoted poor economic growth.
The welfare states of employees are inadequately considered. For instance, policies that encourage lower cost of building assets and higher savings rates for working and middle-class families have not been enacted. Therefore, these families cannot get better economic security in the country. Besides, Venezuelan government failed to install programs that can ensure workers are automatically enrolled in retirement plans of the country. Also, there has been lack of programs that can provide workers with a savings credit or rather federal match for retirement savings accounts which are important for low-income families to build their wealth since it can help them to access low-cost financial services (Aitken, Harrison and Lipsey).
In conclusion, from the above case studies involving the comparison of the economies of Sweden and Venezuela, it is evident that equity and efficiency are important aspects of the economic success of a state. For a country to be considered developed, it must show reduced poverty and unemployment rates, people should feel comfortable with the available resources and social services should be available for every member in the society. This can only be achieved when the government takes part in ensuring every resource is optimally allocated to serve each citizen in the country in the best way while minimizing waste and inefficiency. The government should also ensure that it distributes its economic resources, assets, and tax liability fairly and equally among its people.
Works Cited
Aitken, Brian, Ann Harrison and Robert E Lipsey. "Wages and foreign ownership A comparative study of Mexico, Venezuela, and the United States." Journal of international Economics 40 (2014): 345-371.
Dobzinski, Shahar, Noam Nisan and Sigal Oren. "Economic efficiency requires interaction." Proceedings of the forty-sixth annual ACM symposium on Theory of computing (2014): 233--242.
Krugman, Paul R. "Increasing returns, monopolistic competition, and international trade." Journal of international Economics (2013): 469-479. Elsevier.
Schnitzer, Martin. The economy of Sweden: a study of the modern welfare state. Praeger Publishers, 2015.
Weisbrot, Mark and Luis Sandoval. "The Venezuelan economy in the Ch{\'a}vez years." Center for economic and policy research (2008): 5.
Westlund, Hans. "Social economy and employment--the case of Sweden." Social economy and employment--the case of Sweden (2013): 163-182.
