TITLE:
The Equity-Efficiency Conflict: Improving Pareto’s Optimality Doctrine
AUTHORS:
Basil Dalamagas, John Leventides, Stefanos Tantos
KEYWORDS:
Equity-Efficiency Trade-Off, Pareto Optimal, Optimal Taxation, Income Distribution, Growth, Incentives
JOURNAL NAME:
Theoretical Economics Letters,
Vol.12 No.4,
August
9,
2022
ABSTRACT: A central issue in Public Economics is the
appropriate design of a tax system that will succeed in reconciling the
concepts of equity and efficiency. In the present study, the standard
assumption of the household’s utility being dependent on consumption (income)
and labour (leisure) is adopted to arrive at a decision as to the nature of
distortions and the fiscal measures required to eliminate them. The comparison
of a utility function (with consumption and labour being treated as exogenous),
that causes no distortions, with another utility function (with consumption depending
on indirect taxes and labour supply on income taxes), that generates
distortions, allows us to carry out a number of econometric, mathematical, and
empirical tests, designed to redress the balance between the MRS and the MRT
and to eliminate the distortions originating in the labour market and/or the
commodities market.