Which of the following best describes the fairness–efficiency trade-off in microeconomics?

• A. Policies that increase equality may reduce allocative or productive efficiency.
• B. Productive efficiency guarantees that all individuals receive the same income.
• C. Allocative efficiency always leads to perfect equality in resource distribution.
• D. Fairness and efficiency can always be maximized simultaneously without any trade-offs.

Answer: (A)

Verified step by step guidance

1. Understand the concepts involved: 'Fairness' in microeconomics often refers to equity or equality in the distribution of resources or income, while 'efficiency' refers to how well resources are allocated to maximize total output or welfare.
2. Recognize that 'allocative efficiency' means resources are distributed in a way that maximizes total benefit to society, and 'productive efficiency' means goods are produced at the lowest possible cost.
3. Identify that the fairness–efficiency trade-off suggests that policies aimed at increasing fairness (such as redistributing income to achieve more equality) may lead to a reduction in efficiency, because they can distort incentives or resource allocation.
4. Evaluate the given options by comparing them to the definitions: for example, productive efficiency does not guarantee equal income, and allocative efficiency does not necessarily imply perfect equality.
5. Conclude that the best description of the fairness–efficiency trade-off is that policies increasing equality may reduce allocative or productive efficiency, reflecting the inherent trade-off between equity and efficiency.