This post is dry. But if we want to talk about policy and fairness we gotta do some of the hard work making sure we understand how our ethical principles can be measured. See it as part of trying to build more measures to help us understand arguments around policy given what Sen raises here. So with that in mind lets define equity:
Equity. Is the word economists unjustifiably confuse with fairness in order to pay lip service to distributional concerns
Ok I’m being a bit of a dork – in all fairness equity is a good start in asking these questions, but we have to see these measures as only a start!
At the most basic level, when we think about output/income and its distribution in society we consider the average of the income distribution (the mean) and its dispersion (the variance). If incomes are rising over time as they have been for 200 years, then the variance also rises so we normalise such measures. This is where inequality measures like the Gini coefficient come from.
The idea of (income) equity goes a step further than just describing the general distribution of income – it considers what happens when we impose an external policy that changes that distribution. It measures a couple of principles that we may – or may not – value when applying a policy that changes the distribution of income:
- Vertical equity: Captures the proportionality of the system applied – if we introduce taxes are people with higher initial incomes paying proportionally more, if we introduce transfer payments are people with lower initial incomes receiving proportionally more?
- Horizontal equity: When we have two individuals we see as “equals” does this policy system treat them the same way?
With taxes and transfers these measures involve comparing the way people are treated by the tax-transfer system based on a view on what constitutes “equals”. Specifically, these two concept can only fit together without conflict when looking at income if equals are defined as people with the same income.
Now in this post I will concentrate only on Vertical Equity – we can do Horizontal Equity another time! And in line with my desire to be a bit more useful I want to focus on how we might measure these concepts, and what we are assuming when we do.