Fiscal Equalisation: Some Questions of Design

The case for fiscal equalisation can arise because of differences between states' average incomes or populations. In this paper, we examine the latter in a simple case, using different formulations of the social welfare function: Benthamite; Rawlsian; and Nash. We distinguish, in the process, two different understandings of efficiency abroad in economics — a Paretian notion, that is irrelevant to the case in hand; and a quasi-utilitarian sense. We conclude that fiscal equalisation is required only in the Rawlsian case. In all other cases, private goods consumption should be equalised — but no fiscal equalisation is required.