Two Cheers for the Market but Not Three

We have seen that markets have remarkable efficiency properties. But does malaise afire capitalism always produce the greatest happiness for the greatest numbers? Not necessarily. People are not equally endowed with purchasing power. Some are very poor . through no fault of their own, while others are ver), rich through no virtue of their own. So the weighting of dollar votes, which lie behind the individual demand curves, may look unfair.

A system of prices and markets may be one in which a few people have’ most of the income and wealth. They may have inherited much scarce land; they may have perceived the immense value of rail- . roads or steel; they may have stumbled onto a gold mine; they may have developed an immensely valuable software monopoly. The economy might be highly efficient, ‘squeezing a great amount of guns and butter from its resources, but the rich few are eating the butter or feeding it to their poodles, while
the guns are merely protecting the butter-of the rich. A society does not live on efficiency alone.

Philosophers and the populace ask, Efficiency for what? And for whom? Society may choose to change a laissez-faire equilibrium to .improve the equity or fairness of the distribution of income and wealth. A society may decide to sacrifice efficiency to improve equity. Is society satisfied with outcomes where the maximal amount of bread is produced? Or.will modern democracies take loaves from the wealthy and pass them out to the poor?

There are no correct answers here. These are normative questions answered at the ballot box or the barricades. Positive economics cannot say what steps governments should take to improve equity. But economics can offer some insights into the efficiency of different government policies that affect the distribution of income and consumption.

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