Equilibrium and efficiency under pure entitlement systems

Abstract

Two types of answer have been given to the question of how government should contribute to the happiness of its citizens. One is that it should take a direct (and perhaps coercive) role in the pursuit of optimality or efficiency. The other is that it should indirectly promote voluntary cooperation among its citizens by providing procedural justice to them (e.g., enforcement of property rights). This paper addresses the question of how cooperative equilibria of a "minimal government" (one which guarantees rights but which does not make direct allocative decisions) would compare with social states which are Pareto efficient for its citizens. Specifically it examines whether or not such a government would be unbiased (i.e., whether every Pareto-efficient social state would be possible to support as a cooperative equilibrium) in an environment where its citizens might impose externalities on one another. Unbiasedness of equilibrium could be interpreted to mean that under ideal circumstances (i.e., that cooperative outcomes would in fact be achieved) a minimal government would be procedurally fair. However, unbiasedness would also imply that such a government could not guarantee an egalitarian distribution of wealth, or any other feature except Pareto efficiency, in an equilibrium social state.