Equity-Efficiency Tradeoff

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DEFINITION of 'Equity-Efficiency Tradeoff'

An economic situation in which there is a perceived tradeoff between the equity and efficiency of a given economy. This tradeoff is commonly viewed within the context of the production possibility frontier, where any additional gains in production efficiency must be offset by a reduction in the economy's equity.

INVESTOPEDIA EXPLAINS 'Equity-Efficiency Tradeoff'

Within this equity and efficiency tradeoff, equity refers to the economy's financial capital, while efficiency refers to the future efficiency in the production of goods and services. This theory asserts that, in order for a nation to become wealthier, it must save its equity. However, these additional savings will hurt the development of more efficient production in the future.

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