The equity-efficiency trade-off reconsidered

Envy-free and Pareto optimal allocations never exist in large economies with production, if there is enough variation with respect to preferences and innate abilities of the agents. If distributional equity is given priority only second best envy-free allocations may be considered. Those allocations are characterised in finite and continuum economies. In continuum economies envy-free allocations are type-egalitarian, i.e. agents with the same preferences but different abilities obtain the same consumption-labour bundle. Regarding implementation envy-free allocations can only be implemented by a tax depending on labour and income.I would like to thank two anonymous referees and the editor in charge of this paper for very helpful comments.