The Equity-Efficiency Conflict: Improving Pareto’s Optimality Doctrine

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.

The Equity-Efficiency Trade-Off in the Presence of Distorting Taxation

“…• For further discussion of the equity-efficiency controversy, see for example Dalamagas et al (2022), Goulder et al (2019), Stantcheva (2020), Piketty and Saez (2013), Gürer (2021), Colas and Hutchinson (2021), Jacobs et al (2010), Gerritsen (2017), McKenzie (2021, Muinelo-Gallo and Lescano (2022), Magnani and Piccoli (2020).…”