I’ve made a post over at my blog that uses part of this post in the discussion. You might be interested to check it out! 🙂

Cheers,
Oliver

“the idea of an equity-efficiency trade-off is itself subjective”

Statistics on ‘efficiency’ in technical terms are objective, while equity is subjective.

Anything that defines a trade-off between a objective and subjective element must be subjective.

So are you saying that the method by which we introduce equity into our models is subjective (as we have to define where to put it in the individuals value function). I would agree with that, I think that is a very appropriate point.

I think we might be talking cross-purposes here. I agree that efficient can equal optimal. However, the efficiency-equity trade-off that first years learn involves separating the objective measures of efficiency from the bits that require value judgments – which we then term equity.

In reality I guess I have a semantic problem with efficiency being used for two different things.

“Policy decisions include equity decisions, does explicitly modeling them within the model without endorsing any particular equity function add anything?”

Good question. I think it only adds something insofar as the economic method might be a better way of framing those issues than other methods. If an economist, with all there experience making models, can provide a general model, which policy analysts can then set values into I think we could be in a good place.

Also note that I separate the role of policy analysts and economist, however these don’t have to be separate people. The important thing is that the two steps are recognised as separate.

Policy decisions include equity decisions, does explicitly modeling them within the model without endorsing any particular equity function add anything? I can’t think of how there is any practical difference here. As i said the the other day, on a lot of policy issues the equity issues are external to the analysis, depending on what the opportunity cost is.

The discount rate is subjective 😉

In that line “This is of course false” I’m not saying that we can’t do a lot with our tools, I’m just saying (again) that optimal policy comes from value judgments, and we have to realise that our analysis only covers one part of that.

My main question has to do with how we set up our models. Should we include equity considerations in our framework but then not define the parameters, or should we focus on only looking at efficiency and completely ignoring equity in our models. Or can we do both – as long as we are clear about the difference. I’d go for the last option.

Actually, if we expand our equity concerns to future generations, and throw in a low discount rate, I’m certain you could get situations where the efficient solution is optimal, even when equity does enter into the welfare function. Just sayin’, that’s all…