Governments' Microeconomic Objectives

Idea

In individual markets the government pursues two microeconomic objectives: efficiency and equity. Together they define what a “good” market outcome looks like, and a shortfall against either is the rationale for intervention.

Mechanism

• Efficiency — the government wants resources allocated to the goods and services society most values, produced at least cost. The benchmark is the social optimum, where marginal social benefit equals marginal social cost; the three efficiency concepts the syllabus uses are set out in allocative, productive and dynamic efficiency. Market failure is, predominantly, a failure to reach allocative efficiency.

• Equity — the government also wants a fair distribution of economic welfare, so that essential goods and services reach those who need them. As equity sets out, this is a normative aim distinct from efficiency: an efficient market can still be inequitable.

Considerations

The two objectives can pull apart. A policy that improves equity — a steeply progressive tax, generous transfers — can blunt incentives and so cost efficiency; a policy that maximises efficiency may tolerate an unequal distribution. Which objective takes precedence is a value judgement, and where they conflict is a standard source of evaluation in microeconomic-policy answers.