Why might inequality be necessary? Incentives, freedom, and efficiency

Todd A. Knoop

Chapter 2 in Understanding Economic Inequality, 2025, pp 25-46 from Edward Elgar Publishing

Abstract: Before discussing the reasons to be worried about inequality, it is important to understand why some scholars have argued that we shouldn’t worry about inequality, or should even be happy about it. This “let the market decide” approach to inequality has a long history, not only in economics but also in philosophy. This chapter examines the arguments that inequality simply reflects efficient differences in productivity that should be rewarded according to the concept of Pareto efficiency. It examines the argument that inequality incentivizes higher productivity, including a discussion of the distortionary impacts of policies to correct for inequality, such as the Laffer curve. It also examines the libertarian arguments based on meritocracy that providing equality of opportunity should be our focus rather than promoting equality of outcomes. Finally, this chapter examines the idea that economic policy should concentrate on dealing with poverty and not inequality, known as Sufficientarianism.

Keywords: Tradeoff between efficiency and equity; Pareto efficiency; Laffer curve; Libertarianism; Meritocracy; Sufficientarianism (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035360116
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