Updated July 4, 2023
What is Equity in Economics?
Equity in economics refers to fairness and justice in the distribution of resources, opportunities, and rewards within an economic system. It is concerned with ensuring that the benefits and burdens of economic growth and development are distributed equitably across different groups in society, such as different income levels, ethnicities, and genders.
In general, equity can take on several forms, including income equity (the distribution of income across individuals and households), wealth equity (the distribution of wealth across individuals and households), and opportunity equity (ensuring that everyone has equal access to opportunities for education, employment, and economic growth).
How does Equity in Economics work?
Governments across the globe work to ensure equity in economics by introducing various tax laws, policies, aids, and subsidies to ensure the proper distribution of wealth. Thus, equity is a significant concept in both microeconomics and macroeconomics.
In microeconomics, equity refers to the distribution of income and wealth among individuals, households, or other economic units.
For example, economists consider a policy or system that results in the unequal distribution of income and wealth to be inequitable. A more equitable distribution of income and wealth is one where the distribution is more balanced, and the differences between rich and poor are not so big.
In macroeconomics, equity refers to the fairness and impartiality of economic policies, institutions, and systems that affect the economy wholly.
For example, economists consider a regressive tax system that imposes a greater burden on lower-income households to be inequitable. On the other hand, a progressive tax system that imposes a greater burden on higher-income households is more equitable.
Types of Equity in Economics
#1 Horizontal Equity
- Horizontal equity is a principle of fairness in economics that states we should treat individuals with similar economic circumstances similarly.
- This means that people with the same income, wealth, or other economic characteristics should pay the same amount of taxes, receive the same benefits, and face the same regulations and restrictions.
- For example, consider a tax system. Horizontal equity would require that two individuals with the same income pay the same taxes, regardless of other factors such as race, gender, or occupation. This helps to ensure that the tax system is fair and that the government distributes the burden of taxes evenly among people with similar economic circumstances.
#2 Vertical Equity
- This principle focuses more on the income aspect of the economy. It advocates the idea of income redistribution in the form of tax.
- According to this principle, a person earning more income must pay more taxes, thus, redistributing his wealth to different sections of society.
- The combination of horizontal and vertical equity forms the basis for a fair and impartial tax system, as it balances the goal of treating similar individuals similarly to ensure that those with better resources contribute more to the system.
Examples of Equity in Economics
Consider two individuals, both earning $50,000 per year. Under a horizontal equity system, both individuals would pay the same taxes, even if one individual is single and the other is married with children. Economists base this idea on the concept that both individuals are in similar economic circumstances, as they have the same income, and therefore the tax system should treat them similarly.
An individual who earns $100,000 per year will pay a higher tax than his spouse, who earns $50,000 per year. Economists base this idea on the concept that the higher-earning individual has a greater ability to pay and therefore should contribute more to financing public goods and services.
Suppose a government implements a program to provide free access to quality education for all children in the country. This program is an example of equity in economics, as it seeks to ensure that all children, regardless of their family’s income level or social status, have an equal opportunity to receive a quality education. By providing access to education, the government is investing in the next generation’s human capital and helping to reduce income inequality over time.
- As there is no discrimination based on caste, creed, or gender, it inspires confidence in everyone and keeps everyone engaged.
- Equity in economics provides Equitable life opportunities, without prejudice, based on circumstances for which we can’t hold a person accountable.
- It also introduces the idea of a meritocracy, in which the system rewards people for their accomplishments rather than outside factors.
- Promoting fairness among employees or workplaces can increase the level of production. They are also well-positioned to influence both social and economic welfare.
- The government uses this principle to give social security. Government offers Social protection to ensure that no one slips below a particular level of well-being, where more unmet demands may exacerbate harmful cycles.
Frequently Asked Questions (FAQs)
Q1. What does equity mean in economics?
Answer. Equity in economics refers to the idea that all individuals should have equal access to employment, income, and taxation opportunities. This approach aims to improve the well-being of society and, as a result, the economy as a whole.
Q2. Why is equity important in economics?
Answer. Equity is important in economics for several reasons:
- Fairness and justice: Equity helps to ensure that economic systems, policies, and institutions are fair and impartial and that they distribute benefits and burdens in a way that we, as citizens, perceive as just and equitable.
- Reduction of poverty and inequality: Equity can help reduce poverty and inequality by ensuring a proper balance of distribution of income and wealth. This can improve the well-being of individuals and households and reduce the gap between rich and poor, positively impacting economic growth and stability.
- Promotion of economic growth: Equity can promote economic growth by creating a level playing field for businesses and individuals and providing equal access to education, health care, and other important resources.
- Encouragement of investment and entrepreneurship: Investors and entrepreneurs are likelier to invest and start new businesses when they believe that the game rules are fair and have equal access to opportunities and resources.
- Improved social outcomes: Equity can improve social outcomes by reducing poverty, increasing access to education and health care, and improving overall well-being.
Q3. What is an example of equity in economics?
Answer. An example of equity in economics is implementing a minimum wage law, which sets a minimum hourly pay rate for all workers in the country.
This policy aims to ensure employers pay all workers, regardless of their job or skill level, a fair wage for their work. By setting a minimum wage, the government is helping to reduce poverty and ensure everyone has access to the necessities of life.
This was an EDUCBA synopsis of Equity in Economics. You can view EDUCBA’s recommended articles for more information,