Theories of Resource Distribution and Equity in Social Welfare Theory

The conventional social welfare theories in economics are not very explicit on the subject matter of equity and inequality. This is so because; equity issues are seen to be normative and ethical in nature. However most early works on equity and inequality in economics are associated with the utilitarian and the maximin theory of resource distribution known as the theory of justice by Harsanyi and Rawls. Later on, in the 19th and 20th century, many economists developed interest on the subject matter due

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to the problems posed by the existence of inequity and income inequality in the society. The ethical nature of inequity in health and health care also led to the development of health economic literature to address this problem. Other ethical theories and theories of justice in the literature include the entitlement and the libertarian theory, the egalitarian theory, the deontological theory, the envy theory as well as the theory of virtues and rights. However this study will examine the economic related theories of equity or fairness which is the utilitarian and the maximin theory.

Other theories developed after the maximin and the utilitarian theories are also examined as well as other health economic related literatures.

3.2.2.1 The maximin theory (theory of justice as fairness)

The maximin theorem is associated with Locke, Rouseau, and Kant. Their ideas were later articulated by Rawls (1971). The basic argument of the maximin theory is that for justice, fairness and equity to be achieved in the distribution of resources, decisions regarding resource allocation should be taken in favour of the worse-off members of the society. In other words the maximin principle states that policies as regard resource allocation must be evaluated in the interest of the least advantaged or the poorest. The maximin principle in the original position would lead to a concept of justice based on the difference principle which evaluates every possible institutional arrangement in terms of the interest of the least advantaged or the poorest or otherwise, the worse off individuals. Rawls advocated for equality of primary social goods which are sufficient to equalise certain inputs into welfare. Individuals may not attain the same satisfaction in welfare if their taste and life plan are expensive and requires great wealth than the average. He therefore, held the individuals responsible for their life plans in terms of expensive taste that requires great wealth beyond the average. Individuals with expensive taste will not receive at par with the Rawlsian justice, more resources than someone who constructs a more modest plan. In this sense, individuals in the Rawlsian theory are held responsible for their own expensive taste. The society does not compensate them with more resources should they develop plan of life which are more expensive than the average, therefore, equity and distributive justice according to Rawls entails compensating persons only for the disadvantages they suffer due to factors in their environment which are morally arbitrary and beyond their control.

The maximin theorem is based on two strong assumptions. The first is that individuals are assumed to be strongly risk averse. Secondly, it is based on the

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assumption that as a decision rule, fair and equitable resource allocation decisions are taken in the "original position" under the "veil of ignorance". The original position is a hypothetical scenario where no one knows his/her place, class position or status in the distribution of natural assets and abilities. It corresponds to the state of nature in the traditional theory of the social contract. The original position according to Rawls is the appropriate initial status quo which ensures that the fundamental agreement reached as regards resource distribution are fair and just. The veil of ignorance according to Rawls simply means individuals are supposed to choose social states they prefer without knowing which members of the society they will become. This allows them take decisions with an unbiased mind. Persons in the initial position will choose based on the principle of equality in the assignment of basic rights and duties as such inequality are just only if they result in compensating benefits for the least disadvantaged in the society. The theory concludes that inequality is just and fair (equity) only if it results in compensating benefits for the least disadvantaged in the society as such, the cause of unfair inequality (inequity) should be the focus of policy makers in compensating the disadvantaged.

The maximin principle in theory of income distribution finds great application in the theory of optimal income distribution and taxation and also finds application in equity in health care delivery and utilisation which is the focus of this study. However, the maximin principle leads to highly irrational conclusions due to the strongly risk averseness assumptions in health care. In addition, Rawls difference principle has unacceptable moral implication in health economics. For instance, if there are two individuals with different health states, the individual with the worse health state should be given the utmost attention even if his/her chances of survival is small compared to the individual with a better health state and better chances of survival.

The difference principle always requires that absolute priority in the interest of the worse-off individual be given no matter what, even if his/her interest is affected in a minor way and all other individuals in society had opposite interests of the greatest importance. The need of each individual in relation to other people's needs is not taken into consideration at the same time, as such Rawls principle does not satisfy the requirements for horizontal equity.

Following Rawls theorem, Dworkin (1981) also constructed a "thin veil of ignorance"

where more than one individual takes decision behind the veil of ignorance. This assumption is made because; the decision problem is extended from one individual to

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a market system of many individuals. Dworkin's model is centered on insurance where each individual is given the same purchasing power with which to purchase insurance against a bad draw in the birth lottery which allocates those resources. He assumes the individuals behind the veil of ignorance know the preferences of those individuals whom they represent but do not know these individuals resource endowments.

Dworkin views equality of resources as a state in which transferable resources, principally, money that individuals have provide them with appropriate compensation for the shortfalls they sustain in their endowments of non transferable resources.

However, unlike the Rawlsian model, there is no information as per giving priority to the worse-off in Dworkinian insurance scheme.

Arneson (1989) built on Rawls and Dworkin's theories to stress the need for equalising opportunity instead of welfare outcomes which is the focus in the Rawlsian and Dworkinian model. Equal opportunity implies that the effect of disadvantageous circumstances beyond the individual control on the pursuit of welfare be neutralized so that the outcome a person eventually achieves is due only to his/her effort and not based on factors beyond his/her control.

3.2.2.2 The Utilitarian theory of welfare and equity

The proponents of the utilitarian theorem include Hume, Smith, Benthern, and Mill.

Their ideas were refined and articulated through the work of Harsanyi 1953, 1955, and 1975. Harsanyi's utilitarian theorem states that there exists a social welfare function which is unique to linear transformation. It is a single value function and a weighted sum of the individual utilities. The social welfare function is maximised by the choices of individuals which is conformable to the social preference. The basic argument about the utilitarian theorem is that, based on the principle of insufficient reason, a rational person in the original position which he referred to as an impartial observer assigns equal probability to the prospect of being in any other person's position within the society. The impartial observer is a utilitarian who takes resource distribution decision to maximise the average and expected utility of the society under the veil of ignorance.

Expected utility maximisation under the veil of ignorance by an impartial observer is an egalitarian principle that promotes equality, fairness and equity.

The utilitarian theory is based on the assumption that the social preferences are consistent, transitive, can be represented by a Von Nueman Morgenstern (VNM) utility function. It is also assumed that, individuals have independent evaluation of

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utility distribution among each pair of individual. This allows for individualistic value judgment giving room for social choice that is dependent solely on individual interest that is directly affected. The theory concludes that based on the principle of insufficient reason, a rational person in the original position which he refers to as an impartial observer assigns equal probability to the prospect of being in any other person's position within the society. The impartial observer is a utilitarian who takes resource allocation decisions to maximise the average and expected utility of the society under the veil of ignorance. This meets the egalitarian principle that promotes equality, fairness and equity. The utilitarian theory is generally applicable because it takes into cognisance the welfare of every member of the society. Health economist found the theory useful because the concentration index was found based on the utilitarian principle. However, the Rawls and Utilitarian theorem do not have explicit and detailed conceptualisation of equity in health care.

The strengths of the utilitarian theorem over the maximin theorem lie on the fact that, the utilitarian theorem takes into cognisance the welfare of every member of the society. This implies that the needs and interest of every member of the society is considered. One of the basic shortcomings of the utilitarian theory according to Rawls (1971) is that the principle of utility is incompatible with the concept of social cooperation among equals for mutual advantage. Based on the individual rationality, a rational man will not accept the resource distribution decision merely because it maximises the societal welfare function irrespective of its permanent effect on his own basic rights and interests. The utilitarian theory is also criticized for focusing only on how utility affects the overall wellbeing of the members of the society. There is no information about source or quality but only how their satisfaction would affect the total wellbeing. Social welfare therefore depends solely upon the level of satisfaction or dissatisfaction of individuals. Thus if individuals are selfish, there is tendency for discrimination in resource distribution.

Romer (2006) built on Harsanyi's theory of the impartial observer as a solution to a representative soul's decision problem in a simple environment where he included information and welfare levels of individuals. According to Romer (2006), the veil of ignorance argument stressed by the utilitarian and the maximin theorem if properly modeled contravenes the fundamental egalitarian or equity principle. "Given the standard sorts of preferences, the recommended resource distribution contravenes the

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egalitarian principle of transferring wealth. The principle states that the disable individuals should receive more wealth than the able. Disability in this respect simply means the requirement of a greater wealth increment than others to achieve a given status in welfare. This is because, in his model, the able receives more wealth at the chosen distribution than the disable. This claim contradicts the maximin principle as well as the utilitarian. His theory is based on the assumption that individuals have different but constant relative degrees of risk aversion. His argument on the veil of ignorance is based on the assertion that it is better to make decisions ex-post, that is after we know which preference order and welfare functions is associated with several positions because we cannot be sure that the decision makers drawn from the society in question are not simply making recommendations based on selfish interest. Also, decisions are made with shortcomings as important information about real world is massively discarded. However, the veil of ignorance construct has the benefit of enforcing objectivity or impartiality.

One thing is certain from the equity related theories of welfare, the idea of equality, giving attention to the worse off and the concept of individual responsibility in determining what is just and unjust, fair and unfair, equitable and inequitable.

However, these theories do not have explicit and detailed conceptualisation of equity in health care. In the next section, an attempt is made to review the health care related equity issues.