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Sun Dec 21, 2014, 12:24 AM

One small study that explodes the myth that inequality is efficient

One small study that explodes the myth that inequality is efficient

by Matthew Yglesias at Vox



And yet it continues to be the case that allocating scarce goods through prices is much more efficient. Joseph Stromberg's recent piece about the advantages of demand-responsive parking is a case in point. By charging more when parking spaces are in high demand, cities can eliminate pointless (and environmentally destructive) circling for parking. They can also capture revenue that can be used to cut taxes or boost services. Roughly the same is true of "congestion pricing" to alleviate traffic jams, and carbon taxes to tackle the even bigger problem of climate change.

Even back to the water case, the argument in favor of prices really does seem sound. Different people care a different amount about being able to use water lavishly why shouldn't the reductions be done disproportionately by the people who don't care so much, while those who care a lot pay more?

To the extent that inequality undermines arguments for efficient price-based schemes, the correct conclusion is to reject inequality, not reject pricing. It's probably no coincidence that the three countries to really embrace congestion pricing are either egalitarian (Norway and Sweden) or dictatorial (Singapore). Efficiency-enhancing economic schemes often simply assume a background where there's not too much inequality, in part because, in many cases, they were hatched during the decades when the income distribution was much more even. But to actually implement these schemes in the real world, we need to also deliver the equality.

There's an old saw in the economics profession that there's a tradeoff between egalitarian outcomes and efficient ones, but empirical research consistently fails to find evidence that inequality boosts growth or redistribution slows it. One reason is that needs conditions of macro-equality to make micro-efficient schemes tolerable


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