welfare economics Welfare economics is a branch of economics that uses microeconomic techniques to evaluate well-being (welfare) at the aggregate (economy-wide) level. Attempting to apply the principles of welfare economics gives rise to the field of public ec ...

, distributive efficiency occurs when goods and services are received by those who have the greatest need for them.

Abba Lerner Abraham "Abba" Ptachya Lerner (also Abba Psachia Lerner; 28 October 1903 – 27 October 1982) was a Russian-born American-British economist. Biography Born in Novoselytsia, Bessarabia, Russian Empire, Lerner grew up in a Jewish family, which ...

first proposed the idea of distributive efficiency in his 1944 book ''

The Economics of Control ''The'' () is a grammatical article in English, denoting persons or things already mentioned, under discussion, implied or otherwise presumed familiar to listeners, readers, or speakers. It is the definite article in English. ''The'' is the m ...

''.

The law of diminishing marginal utility

The concept of distributive efficiency is based on the law of

diminishing marginal utility In economics, utility is the satisfaction or benefit derived by consuming a product. The marginal utility of a good or service describes how much pleasure or satisfaction is gained by consumers as a result of the increase or decrease in consumpti ...

. According to this economic law, as a person gets more to spend, he will buy things that give him less and less utility. For example, if a person is given a gift certificate for a music download (and has no way to resell the certificate), he will use the gift certificate to purchase the song he will enjoy the most. If he is given another, he will buy his second favorite song. The process continues as long as the man keeps getting certificates for downloads. Each additional song the person buys is slightly less desirable than the one before.

Diminishing utility and society

Lerner applied the concept of

utility As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosoph ...

and its associated "law of marginal utility" to the distribution of income in society. The law of diminishing marginal utility implies that poorer people will gain more utility from money for additional spending than the wealthy. For instance, if a homeless family is given a gift certificate for a house, they will be able to use it to provide shelter for themselves. If a very rich person is given such a gift, he may spend it on a vacation residence which he will only use a few weeks of the year. As such, aggregated utility would be maximized by taking wealth from the rich and giving it to the poor, and the state of optimized utility would be perfect economic equality. As Lerner puts it, "If it is desired to maximize the total satisfaction of a society, the rational procedure is to divide income on an equalitarian basis" (Lerner, 32). In other words, if we are given a fixed amount of wealth and a group of people to distribute it to, we can maximize total happiness by dividing the wealth equally between the members of that group. However, in real situations the total amount of wealth is not fixed, and it has been argued that too much redistribution of income can reduce this total amount by lowering incentives for economic growth and development. Knowing this, Lerner qualified his earlier statement: "The principle of equality would have to compromise with the principle of providing such incentives as would increase the total of income available to be divided” (Lerner, 36). In this view, a balance must be reached between equality and incentives.

Criticisms of utility's relevance

Different value systems have different perspectives on the use of utility in making moral judgments.

Deontological In moral philosophy, deontological ethics or deontology (from Greek: + ) is the normative ethical theory that the morality of an action should be based on whether that action itself is right or wrong under a series of rules and principles, r ...

views of morality focus on factors other than utility. Also, many Marxists,

Kant Immanuel Kant (, , ; 22 April 1724 – 12 February 1804) was a German philosopher and one of the central Enlightenment thinkers. Born in Königsberg, Kant's comprehensive and systematic works in epistemology, metaphysics, ethics, and aest ...

ians, and certain

libertarians Libertarianism (from french: libertaire, "libertarian"; from la, libertas, "freedom") is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom, and minimize the state's enc ...

(such as Robert Nozick), all believe utility to be irrelevant as a moral standard or at least not as important as others such as natural rights.

References

* Friedman, Milton. "Lerner on the Economics of Control." ''The Journal of Political Economy'', Vol. 55, No. 5. (Oct., 1947), pp. 405–416. {{JSTOR, 1825534 * Lerner, Abba P. ''The Economics of Control''. New York: Macmillan Co., 1944. Economic efficiency