What is Equity in Economics?
Equity in economics is defined as process to be fair in economy which can range from concept of taxation to welfare in the economy and it also means how the income and opportunity among people is evenly distributed.
Every nation should have a common economic objective which is defined as being fair and even in the distribution of income and opportunity among people. The absence of equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet. creates a scope of inequality in the market.
For example, in a monopoly market where there is only a single buyer the other people sell their labor at a very cheaper rate as compared to a competitive market where there is a lot to buy and wages are very competitive too. Income difference is one of the most common problem areas which an economy must face when there is no equity in the economy.
There are primarily two types of equity in economics which are defined as Horizontal equityHorizontal EquityHorizontal equity is a tax treatment that a particular class of individuals who earn the same income should also pay the same income tax. There should be no discrimination between any two persons regarding their savings, expenditure, and deductions claimed but should be leviable with the same income tax. and Vertical equity.
#1 – Horizontal Equity
In this type of economic environment, everyone is treated equally and there is no scope of special treatments or discrimination based on caste/creed/gender/race/profession. An example to support this can suppose there are two persons earning $10,000. Both the person must pay the same amount of tax and there should be no discrimination between the two. Thus, the type of economy demands a system of tax where there is no discrimination and no extraordinary treatment is given to individuals or companies.
#2 – Vertical Equity
Vertical equityVertical EquityVertical equity means that those who earn more should pay more, which means people falling in a higher income group should be charged with a higher tax rate than those in the lower-income group. It is the most widely accepted taxation method by various countries worldwide. is more concerned with the process of redistributing the earned incomeEarned IncomeEarned income is any amount earned by an individual, such as a salary, wages, or employee compensation. It can also be an individual's income through their own business. of common people among the others in the society by means of tax and taxation rules. This means a person who is earning more should also pay more tax or redistribute his/her income as tax. This type of equity calls for advanced or progressive taxationProgressive TaxationProgressive tax refers to the increase in the average rate of tax with the increase in the amount of taxable income so that the liability of paying heavy taxes passes to those who earn a higher income and those with lower income can have a relaxation from the heavy income tax obligations. laws. An example to support vertical equity is like the tax laws which we have where taxes contribute to the vertical amount. Here the person earning more must pay more tax and vice versa.
Examples of Equity in Economics
- Tax can be one of the most important examples of equity in the economy. Horizontal equity is applicable among people belonging to the same level of income group where irrespective of caste/creed/gender/profession one must pay a certain amount of tax as defined by the taxation authority of a nation.
- Here no special treatment is given to anyone or any kind of discrimination is brought in. Similarly, when we discuss vertical equity the same tax laws are different for a certain level of income groups and these are explained by income tax slabs. This is like a person who is within a certain range of income which is considered quite low will pay comparatively less tax than the other person who is earning very well and eventually will shell more amount in the form of excess tax paid.
- Vertical equity is more concerned with the process of redistributing the earned income of common people among the others in the society by means of tax and taxation rules. This type of equity calls for advanced or progressive taxation laws. Vertical equity is more dependant on the principle where the base is more into a progressive rate of tax or proportionality.
Why Equity is Important in Economics?
- The prime aim of implementing equity in economies is to prevent the inequality of incomeInequality Of IncomeIncome Inequality is defined as an unequal distribution of income between the masses or a situation when a large proportion of total income is held by the small percentage of the population. It happens due to variation in sources of income, number of dependents, easier availability of resources, etc. based on gender/caste/creed or any other determining factors.
- Policies that boost equity in the economy can promote social bonding and to a great extent curb chances of any kind of political conflict.
- It can stimulate long term growth for the economy which in turn can serve as a stimulus to the eradication of poverty present in a nation.
- Equity among people or workplaces can enhance the productivity level and they are in a better position to contribute both socially and economically towards the community.
- It instills confidence among all where every individual stays motivated by the fact that there has been no discrimination made based on caste/creed/gender.
- Equity in the economy gives equal life chances where there is no discrimination in the result based on factors for which people cannot be considered responsible.
- It also brings about a concept of meritocracy where people get rewarded or awarded based on their merit rather than any other influences.
- Implementation of a fair competitive market where companies are not often in a practice to cheat their customer who buys the goods or services.
- It also allocates the goods and services based on the actual requirement or need of the people focusing on the necessity of the goods and services.
- Provision of public services based on fair treatment to the consumers where public amenities are charged on an equal basis from others irrespective of their caste/creed/gender or profession.
- It brings about social protection to check no community is going below a certain benchmark of well being as this will create scope of inequality or disadvantage to others.
- Progressive taxation helps in redistributing the income properly where staple goods which are necessary for all may be taxed less and an imported car which is considered as a luxury may be taxed very high.
- Supporting the lower-income segment and upliftment of those communities who are beyond the poverty line is also a major task which equity in economies target for.
- Equity in the economy is a very important factor to keep common people happy and motivated. It also has several benefits that have discussed already. Both horizontal and vertical equity play their own major role in the economy. Vertical equity is the process of redistribution of income where people earning more are taxed more.
- This involves progressive rates of tax and proportionality. When compared to horizontal equity vertical taxes are more achievable and result-oriented and there are many loopholes associated with the horizontal tax. The opposite of equity in an economy is termed as inequality in the economy and equity economies play a crucial role in the removal of inequality from the economy.
This has been a guide to What is Equity in Economics & its Definition. Here we discuss the types of equity in the economy and why equity is important in economics along with examples. You can learn more about from the following articles –