The Tradeoff between Incentives and Economic Equality

Panel (a) is the pessimistic view. Redistribution always blunts incentives, so moving from A toward B buys equality only by giving up output. On this view the only question is how much output a society is willing to trade away.

Panel (b) allows that the first steps may buy both. Public education redistributes, since what children of low-income families receive is worth more than their families pay in taxes, but it also produces the skilled workers an economy needs, so moving from C to D raises output as well as equality. Going from D to E costs almost nothing in output. Only past that, at F, does the familiar tradeoff bite. The slider moves the highlighted point along whichever curve is shown.