Equity and Efficiency

For many patients who need kidney transplants, the new UNOS guidelines, covered earlier, were unwelcome news. Unsurprisingly, those who have been waiting years for a transplant have found the guidelines, which give precedence to younger patients, … well … unfair. And the guidelines raise other questions about fairness: Why limit potential transplant recipients to Americans? Why include younger patients with other chronic diseases? Why not give precedence to those who have made recognized contributions to society? And so on.

Efficiency is about the best way to achieve a goal, like extending the life spans of kidney transplant recipients.
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The point is that efficiency is about how to achieve goals, not what those goals should be. For example, UNOS decided that its goal is to maximize the life span of kidney recipients. Some might have argued for a different goal, and efficiency does not address which goal is the best. What efficiency does address is the best way to achieve a goal once it has been determined—in this case, using the UNOS concept of “net survival benefit.”

It’s easy to get carried away with the idea that markets are always right and that economic policies that interfere with efficiency are bad. But that would be misguided because there is another factor to consider: society cares about equity, or what’s “fair.”

As we discussed in Chapter 1, there is often a trade-off between equity and efficiency: policies that promote equity often come at the cost of decreased efficiency, and policies that promote efficiency often result in decreased equity. So it’s important to realize that a society’s choice to sacrifice some efficiency for the sake of equity, however it defines equity, is a valid one. And it’s important to understand that fairness, unlike efficiency, can be very hard to define. Fairness is a concept about which well-intentioned people often disagree.

ECONOMICS in Action: Take The Keys, Please

Take The Keys, Please

“Airbnb was really born from a math problem,” said its co-founder, Joe Gebbia. “We quit our jobs to be entrepreneurs, and the landlord raised our rent beyond our means. And so we had a math problem to solve. It just so happened that that coming weekend, a design conference came to San Francisco that just wiped out the hotels in the city. We connected the dots. We had extra space in our apartment. So thus was born the air bed-and-breakfast.”

Owners use marketplaces like AirBnb to turn unused resources into cash.
Justin Sullivan/Getty Images

From that bout of desperation-induced ingenuity sprang a company that now connects more than half a million listings in more than 34,000 cities and 192 countries available for shortterm rentals. Airbnb is the most famous and successful purveyor in what is now often called “the sharing economy”: companies that provide a marketplace in which people can share the use of goods. And there are many others: Relay-Rides and Getaround let you rent cars from their owners, Boatbound facilitates boat rentals, Desktime office space, ParkAtMyHouse parking spaces. SnapGoods allows people to borrow consumer goods like power tools from others in their neighborhood or social network.

What’s motivating all this sharing? Well, it isn’t an outbreak of altruism—it’s plain dollars and cents. If there are unused resources sitting around, why not make money by renting them to someone else? As Judith Chevalier, a Yale School of Management economist, says, “These companies let you wring a little bit of value out of … goods that are just sitting there.” And generating a bit more surplus from your possessions leads to a more efficient use of those resources. Why now? Clearly, because of the ease by which people can be matched online. As a result, says Arun Sundararajan, a professor at the NYU Stern School of Business, “That makes it possible for people to rethink the way they consume.”

Quick Review

  • Total surplus measures the gains from trade in a market.

  • Markets are efficient except under some well-defined conditions. We can demonstrate the efficiency of a market by considering what happens to total surplus if we start from the equilibrium and reallocate consumption, reallocate sales, or change the quantity traded. Any outcome other than the market equilibrium reduces total surplus, which means that the market equilibrium is efficient.

  • Because society cares about equity, government intervention in a market that reduces efficiency while increasing equity can be justified.

4-3

  1. Question 4.3

    Using the tables in Check Your Understanding 4-1 and 4-2, find the equilibrium price and quantity in the market for cheese-stuffed jalapeno peppers. What is total surplus in the equilibrium in this market, and who receives it?

  2. Question 4.4

    Show how each of the following three actions reduces total surplus:

    1. Having Josey consume one fewer pepper, and Casey one more pepper, than in the market equilibrium

    2. Having Cara produce one fewer pepper, and Jamie one more pepper, than in the market equilibrium

    3. Having Josey consume one fewer pepper, and Cara produce one fewer pepper, than in the market equilibrium

  3. Question 4.5

    Suppose UNOS decides to further alter its guidelines for the allocation of donated kidneys, no longer relying solely on the concept of “net survival benefit” but also giving preference to patients with small children. If “total surplus” in this case is defined to be the total life span of kidney recipients, is this new guideline likely to reduce, increase, or leave total surplus unchanged? How might you justify this new guideline?

Solutions appear at back of book.