When you hear the word “efficiency,” you might think about the best way to load a dishwasher. Hear a reference to “fairness,” you might think one person washes the pans while the other dries them. (Sorry, we’re a bit preoccupied with “Marketplace Morning Report host” David Brancaccio’s story of the nasty office sink from last week.)
The economically minded — 19th century polymaths, today’s lawmakers and, in just a few minutes, you — think about those words a bit differently.
This week of Econ 101, we’re covering Chapter 3 of the Core Econ textbook “Economy, Society, and Public Policy,” which explores the tensions between efficiency and fairness in economics.
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Key takeaways
Who are our laws designed to benefit?
The third chapter outlines two fundamental goals of public policy: promoting gains for all and addressing unfair distribution of those gains.
In economics, the ideal efficient policy provides everyone affected by it with positive benefits — a rare feat. In reality, policies often create winners and losers, so lawmakers sometimes look for ways to compensate those who are worse off because of the change.
To illustrate this idea , the textbook suggests playing “the ultimatum game,” which is similar to the prisoner’s dilemma in Chapter 2.
Consider this scenario: We give David $100 and tell him to make a deal to split it with you. If you reject David’s offer, you both get nothing. Not very efficient. You could probably agree on a 50-50 split, but where’s the fun in that?
If David offers you $40 and keeps $60 for himself, would you still accept? What if he only offers you $1, and keeps $99? Would you sacrifice a buck to punish him for such an unfair deal?
It’s a useful exercise to understand how notions of fairness and efficiency influence lawmakers. Researchers played this game with real-life American students and Kenyan farmers, splitting them into pairs of “proposers” and “responders.” You can see the offers, and how often they were accepted, in this chart:
We’d all love $100 to throw around, but real-life policymaking is more complicated than this academic exercise, and there are almost always winners and losers. That’s the flip side of what we’re talking about here, redistributing benefits to make an efficient policy more fair.
You might think “fair” is in the eye of the beholder, and it can be, but the book outlines several ways to assess the fairness of a policy, like the “veil of ignorance” — more on that below.
Policies designed for fairer outcomes can have unintended consequences. To examine that, let’s leave the ultimatum game behind for something more concrete.
The book brings up globalization’s trade-offs, and they are good examples. Imported goods have become cheaper, driving down costs for consumers and manufacturers. But jobs get outsourced to countries with lower labor costs, so some communities stateside lose out.
Social safety net funding hasn’t adequately covered those losses, and job retraining programs have yielded mixed results. Globalization’s fallout has been linked to growing political resistance to trade liberalization, but some economists say trying to reverse these effects could make them worse.
Then-President Donald Trump slapped new tariffs on Chinese imports to draw jobs back to the U.S., and China responded with its own tariffs on American agricultural goods. The Trump administration spent billions bailing out American farmers, but subsidies couldn’t quite make up losses from the trade war.
The Biden administration has kept Trump’s tariffs in place and put new restrictions on Chinese tech. Biden also passed the CHIPS Act, pouring Space Race-level money into domestic semiconductor manufacturing. As those new chip plants come online, policymakers (and students of economics!) will be able to evaluate that policy’s success.
Important definitions
- Pareto efficiency: Italian economist Vilfredo Pareto said an economic scenario is efficient when any reallocation of resources to make a recipient better off would make at least one person worse off. But efficient doesn’t mean fair.
- Veil of ignorance: In this thought experiment by American philosopher John Rawls, a person removes their own perspectives or biases to craft fairer policy.
David Brancaccio’s thoughts on Chapter 3
You’ve probably heard of the “cone of silence.” Borrowed from political philosophy, this week’s econ chapter explores the “veil of ignorance.”
No, the veil won’t make you ignorant. The veil is a thought experiment in the form of an imagined opaque curtain. It’s used to assess whether a proposed law or policy would be fair — without knowing whether you would be a winner or a loser under it.
With this veil blocking the view, we don’t know our gender, our race, our age. We don’t know if we’re rich, poor or in between. We don’t know what our job is.
Let’s say somebody gets a bright idea of turning all freeways into toll roads and using the money to fund worker retraining programs. Would that be fair? Try the veil. Is it fair if I’m reincarnated in this new all-toll highway world as a laid-off factory worker needing new skills? In that case, the tolls might seem like a good idea. But if I come back as a long-distance trucker, maybe the new tolls would not seem as fair.
The veil was invented not by an economist but by an American philosopher, John Rawls. For some econ extra “cred” at your next dinner party, pipe up with “Sounds like Rawlsian ‘veil of ignorance’ time” when someone blurts out a bad idea.
More from the show
“Slay the Dragon” If you want to get a little meta on fairness and policymaking, check out “Slay the Dragon.” This 2019 documentary explores political gerrymandering and a grassroots effort to put Michigan’s congressional redistricting process into the hands of an independent commission. Watch the trailer and read David’s thoughts about it.
Next week
Chapter 4 introduces more economic models and how they apply to work, well-being and scarcity.
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This course was written and edited by Ellen Rolfes, Erica Phillips, Tony Wagner and David Brancaccio. It was originally published in February 2023 and updated in November 2024.
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