Abstract
This paper proposes a quantitative approach to study two methodological problems arising when a costly redistribution of resources is implemented through public policies or legal rules: (a) aggregating individual into social preferences and (b) choosing the object of maximization. We consider a redistribution intervention that reduces inequality but diminishes total wealth and we specify a set of social welfare functions combining different preferences aggregation methods and maximands. For each social welfare function, we calculate its “price of equity”, defined as the maximum fraction of total wealth that a society is willing to sacrifice in order to implement the redistribution. Comparing the prices for equity across different social welfare function specifications, we identify systematic relationships and we rank them according to the efficiency-equity orientation. Results show that social welfare functions characterized by aggregation methods conventionally considered equity-oriented may reject redistribution interventions that are evaluated as welfare-improving by social welfare functions using efficiency-oriented aggregation methods. Similarly, social welfare functions considered equity-oriented because using utility as object of maximization may reject distributive policies that are evaluated as welfare-improving by social welfare functions using wealth as maximand. We argue that the quantitative approach proposed, by expounding the trade-off between equity and efficiency connected to different social welfare functions, may prove useful in areas of public law where policy-makers have to engage in the choice of a normative criterion for the evaluation of social welfare. Additionally, our results may inform rule-makers interested in comparing the distributive effects of alternative legal rules in special circumstances where private remedies can efficiently achieve redistribution goals.
Equity and efficiency considerations in area versus individual yield insurance