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Finding the balance between efficiency, equity

An important concept often forgotten in philosophical and policy discussions is the distinction between efficiency and equity. It is something that professor Uwe Reinhardt stresses in his ECO 102 class, and it is, or should be, a recurring theme for Wilson School majors. This was brought home to me repeatedly in a policy conference on free market environmentalism, and it is increasingly important in considering some of the new political fads hyped by well-meaning, but misguided, "granola" types.

Efficiency and equity are two different issues and must be treated separately in all areas of policymaking – not the least of which are environmental concerns. The former is a question for economists to define and ponder in order to design a system whereby total benefit to a particular society is maximized with minimal waste. The latter is a question for politicians, the representatives elected to make the tough moral choices facing a society.


Rational policymaking must begin with the understanding that the most efficient solutions inherently produce inequality, while the most equitable will be inefficient. While efficiency and equity are not diametrically opposed, it is the job of policy analysts to present economists' reports and the options resulting therefrom to politicians, who will then judge how much efficiency to sacrifice in pursuit of a certain equity principle.

In any situation, the responsibilities of a democratic government of a nation based on liberal principles (such as the United States) are to ensure the inviolability of life, liberty and property. Once those inalienable rights are guaranteed, then the government is further charged with acting in the greatest interests of the greatest number of its citizens, in the areas that its citizens consent to loan it power in the first place. Environmental policy is no exception, but it is an area that suffers much from the tragedy of the commons and other difficulties associated with public goods. Privatization, enforcement and the prevention of true market failure are the quickest remedies to environmental inefficiencies and fulfill the government's basic mandate.

If the people of a certain jurisdiction so desire, government can then engage in social engineering by implementing programs on equity lines, as long as people agree to policies that necessarily involve the redistribution of wealth or the stifling of its creation. Along the same lines, policymakers must be told that redistribution is at best a onetime result of a policy change and that it will have efficiency consequences.

They must also recognize that redistribution under a mostly market system is very difficult, as markets work to undo such policies, and that equity targets will not be achieved very precisely, if at all. Command-and-control regulation, meant to protect the most vulnerable in society – be they endangered species or minority groups – will usually hurt that society far more than it can help.

To look at a specific "environmental justice" argument run amuck, consider the current Shintech case in Louisiana. In this case, a chemical company wants to locate a new plant in a small community whose population is mainly black and destitute. While the townspeople welcome the promise of desperately needed jobs and the state environmental regulators have approved the project, several outside environmental groups have succeeded in reopening the permit process and delaying construction of the site.

Though state politicians overwhelmingly favor the new industrial development, and the NAACP has vouched for the plant as a potentially positive step in the lives of black people, the case is at a standstill because of arguments over the "justice" of locating a polluter in a powerless minority community. In this rare case where market activity actually preserves a "way of life" – another contentious issue raised by market opponents – radical activists stymie progress.


When dealing with the environment, as with all policy areas, decision-makers must first separate efficiency questions from equity problems, next deal with market failures and only then, if at all, propose equity solutions. Politicians must think twice before fiddling with market mechanisms for equity reasons, and be able to live with all consequences of such actions.

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