FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Equity in Economics

Updated on January 28, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is Equity in Economics?

Equity in economics is defined as the process to be fair in an economy that can range from the concept of taxation to welfare in the economy. It also means how the income and opportunity among people are evenly distributed.

Key Takeaways

  • Equity in economics is the method of being fair in an economy that can range from taxation to welfare in the economy. In addition, it also tells how income and opportunity among people are evenly distributed.
  • Every nation must have a common economic objective: fair and even income distribution and opportunity among people. The lack of equity creates a possibility of inequality in the market. 
  • Horizontal equity and vertical equity are the two types of equity in economics.

Explanation

Every nation should have a common economic objective, defined as being fair and even in distributing 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.read more 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 much cheaper rate than a competitive market where there is a lot to buy, and wages are very competitive. Income difference is one of the most common problems an economy must face when there is no equity.

Equity-in-Economics

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Equity in Economics (wallstreetmojo.com)

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Types

There are primarily two types of equity in economics: 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.read more and Vertical equity.

#1 – Horizontal Equity

In this economic environment, everyone is treated equally, and there is no scope for special treatments or discrimination based on caste/creed/gender/race/profession. An example to support this can suppose two persons are 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 special 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.read more is more concerned with 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.read more of common people among the others in the society utilizing tax and taxation rules. It means a person earning more should also pay more tax or redistribute their 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.read more laws. An example to support vertical equity is like the tax laws where taxes contribute to the sheer 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.
  • Here, no special treatment is given to anyone, or any discrimination is brought in. Similarly, when discussing vertical equity, the same tax laws are different for a certain level of income groups, and income tax slabs explain these. For example, a person within a certain range of income considered quite low will pay comparatively less tax than the other person who is earning very well and eventually will shell out more in the form of excess tax paid.
  • Vertical equity is more concerned with redistributing the earned income of common people among the others in the society utilizing tax and taxation rules. This type of equity calls for advanced or progressive taxation laws. Vertical equity is more dependent 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 refers to the crucial imbalance of income dispersal across the population.read more 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 political conflict.
  • It can stimulate long-term growth for the economy, which can serve as a stimulus to the eradication of poverty present in a nation.
  • Equity among people or workplaces can enhance productivity, and they are in a better position to contribute socially and economically to the community.
  • It instills confidence among all where every individual stays motivated because no discrimination has been made based on caste/creed/gender.
  • Equity in the economy gives equal life chances with no discrimination 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 influence.
  • Implementation of a fair, competitive market where companies are not often cheating their customers who buy the goods or services.
  • It also allocates the goods and services based on the people’s actual requirements or needs, 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 redistribute the income properly where staple goods necessary for all may be taxed less, and an imported car considered a luxury might be taxed very high.
  • Supporting the lower-income segment and uplifting those communities beyond the poverty line is also a major task that equity in economies targets.

Conclusion

  •  Equity in the economy is an important factor in keeping common people happy and motivated. It also has several benefits that have been discussed already. Both horizontal and vertical equity plays a major role in the economy. Vertical equity is the process of redistribution of income where people earning more are taxed more.
  • 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 inequality, and equity economies play a crucial role in removing inequality from the economy.

Frequently Asked Questions (FAQs)

What is owner’s equity in economics?

Owner’s equity is the owners’ rights in the business’s assets. It is mainly used in a sole proprietorship business. However, it can be known as stockholders’ or shareholders’ equity if the company is designed as an LLC or a corporation.



How to calculate return on equity in economics?

Analysts divide the company’s net income by its average shareholders’ equity to calculate ROE. Since shareholders’ equity equals assets minus liabilities, ROE measures the return on the company’s net assets.


What is the difference between efficiency and equity in economics?

Efficiency refers to how effectively the economy’s resources are used and permitted. In contrast, equity is concerned with how the community’s goods and rewards are allocated among its members and how the accompanying expenses should be distributed.

What is economic equity in economics?

In economics, equity is a technique of being fair in an economy that includes everything from taxation to welfare. Furthermore, it refers to how income and opportunity are allocated among people.

Recommended Articles

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 –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *