Fairness

What do you think of when you hear the word "fair?" While on the surface it may seem like a simple question, in reality, it's not! The topic of fairness is one that is complex and has many interpretations depending on the discipline. For our purposes, fairness in economics focuses on resource allocation. However, it goes much deeper than that! Want to learn more about fairness in economics? Then keep on scrolling!

Fairness Definition in Economics

What is the definition of fairness? This is a rather broad term that can have many definitions depending on the context. In economics, fairness refers to the "proper" distribution of resources to those who need them. Another way to think of fairness is equity. However, it's important to note that fairness is not the same as efficiency. Sometimes what is most efficient is not fair, and what is most fair may not be efficient. With this definition of fairness, how does it apply to economics?

Recall that a major part of economics is the distribution of goods — who gets what. Therefore, fairness appears in economics by determining how to distribute goods to certain groups of people. This happens more often than you think, so much so that you may not even realize that it's happening right in front of you!

As you can see from the rather recent example up above, fairness in economics can be applied to the recent COVID-19 pandemic. The resource in question was a treatment for COVID-19, and the group of people who were prioritized in the scenario were those that were vulnerable to the disease.

Was this the most efficient way of distributing COVID-19 treatment? Some may argue no. However, others would argue that it was the right thing to do — fairness.

Substantive Judgement of Fairness

What is a substantive judgement of fairness? Let's break this down. Substantive judgements of fairness are judgements based on the allocation of a good or service. This occurs when people view fairness in different ways. How can fairness be determined? Let's look at three different ways that people may view fairness¹ :

1. Income
2. Happiness
3. Freedom

Let's go through each one in more detail to further our understanding!

Substantive Judgement of Fairness: Income

Fairness can be determined through one's income. If someone were to view fairness predominantly by the amount of income one has, then they may believe that true fairness should be brought about through changes in the tax code or through direct money transfers to people in need.

Substantive Judgement of Fairness: Happiness

Fairness can be determined through one's happiness. Economists can measure happiness through a variety of metrics that serve as a proxy for happiness. If someone were to view fairness predominantly by how happy someone is, then they may believe that true fairness should be brought about through welfare programs that maximize people's well-being in an economy.

Fig. 1 - World Happiness Report 2022. Source: World Happiness Report ²

As you can see from the chart above, happiness is measurable! The country with the greatest "happiness" is Finland. In fact, many of the countries in the graph are Nordic countries. A notable country that is not present is the United States. One would imagine that a country as wealthy and prosperous would manage to make it on this list.

Substantive Judgement of Fairness: Freedom

Fairness can be determined through one's freedom. Freedom may be measured by the policies a government has in place.

If someone were to view fairness predominantly by how free someone is, then they may believe that true fairness should be brought about through libertarian policies, such as lower taxes and fewer regulations on businesses.

Economic Fairness Examples

What are examples of economic fairness? While it may seem that economics is only filled with rational and self-interested actors, this is not the case! There are many instances where fairness is seen in the economy. Let's take a look at a few examples.

Economic Fairness Examples: Charity

Think about the concept of charity. You give money to an organization that you believe is promoting a good cause. In addition, you rarely get anything in return when you make a donation to a charity. Yet, people still seem to do so. Why is that? This is because people believe it is fair, or the right thing to do to give to charity. Oftentimes, charities are taking donations to help those that are less fortunate. This message resonates with people. If people were purely motivated by self-interest, then no one would ever donate to charity since there is nothing in return for them.

Economic Fairness Examples: Fixing Prices

In the event of a natural disaster, it would be advantageous for businesses to raise the price of their goods. Why? During a natural disaster, people are more desperate and willing to pay any price for a good they deem as necessary. Therefore, businesses would make a profit from the increased prices since they have people who will purchase the products. However, this is not the "right" thing to do. Oftentimes, businesses do not engage in this practice since it would not be fair to take advantage of people who are living destitute lives. However, price-gouging customers would be the rational and self-interested but not fair thing to do in this example.

Economic Fairness Examples: Parking

Think of the last time you were in a parking lot. Did you notice that the spots closest to the store were reserved for people with disabilities? This is yet another example of fairness in economics. The right thing to do is to give people who are disabled the opportunity to be closest to the location they need to get to. Therefore, we all agree that disabled parking spaces should continue to be commonplace in parking lots. However, if fairness was never considered, then all parking spaces would be available to anyone.

Fairness and Reciprocity

What is the relationship between fairness and reciprocity? Let's first define reciprocity. Reciprocity occurs when two people agree to exchange a good or service for mutual benefit. Recall that fairness in economics is seen as the "proper" distribution of resources in an economy. With this understanding, let's continue to dissect the relationship between both terms by looking at examples where there are positive and negative impacts.³

Fairness and Reciprocity: Positive Impacts

A positive impact of fairness and reciprocity can be seen in the wages of workers. When an employer hires an employee, both entities are engaging in an agreement. The employer gives the employee a wage for their service. In this instance, we will see how a high wage impacts the work ethic of the employee.

Let's say that the employer is altruistic and sees a lot of potential in their new hire; the employer is willing to pay their employee a generous wage. Given the higher wage, the employee is happy with their compensation and is willing to work harder as a result.

Fairness and Reciprocity: Negative Impacts

A negative impact of fairness and reciprocity can be seen in certain welfare programs. When a government notices that people are struggling financially, it may want to help out by implementing welfare programs. In this way, people who are financially struggling can be compensated with direct money transfers and in-kind goods and services. However, this can also result in a negative result.

When people who are financially struggling are compensated, they may be incentivized to continue living below the poverty line to benefit from the welfare programs. If those same people got a higher-paying job, then they would no longer receive the same benefits.

In this instance, the government did what was fair for those that are struggling, and people reciprocated by working jobs that ensure they can benefit from welfare programs.

Fairness in Behavioral Economics

What is fairness in behavioral economics? Let's first begin by defining behavioral economics. Behavioral economics looks at the decision-making of individuals through a psychological, cognitive, and emotional lens. You may notice that this way of viewing economics goes against neoclassical economics, where decision-making is primarily a rational choice. Nevertheless, with our understanding of behavioral economics, we can begin to look at how fairness plays a role in this study of economics.

Given that fairness looks at the "proper" distribution of resources, we can see how it fits into the discipline of behavioral economics. Even if something doesn't make rational sense, people will act in ways that benefit others with minimal benefit in return. Charity is an example of people acting in an irrational way, since they do not receive anything in return for their donation, but is "fair" in their eyes. There is no real benefit to donating to a charity besides altruism; as such, fairness finds a place in behavioral economics since neoclassical economics believes that people will only act in a way that gives them something in return.