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The trade-off theory of capital structure is the idea that a company chooses how much debt finance and how much equity finance to use by balancing the costs and benefits. The classical version of the hypothesis goes back to Kraus and Litzenberger [ 1 ] who considered a balance between the dead-weight costs of bankruptcy and the tax saving ...
Pareto efficiency does not require a totally equitable distribution of wealth, which is another aspect that draws in criticism. [31] An economy in which a wealthy few hold the vast majority of resources can be Pareto-efficient. A simple example is the distribution of a pie among three people.
In economics a trade-off is expressed in terms of the opportunity cost of a particular choice, which is the loss of the most preferred alternative given up. [2] A tradeoff, then, involves a sacrifice that must be made to obtain a certain product, service, or experience, rather than others that could be made or obtained using the same required resources.
However, there is no clear theoretical basis for the belief that removing a market distortion will always increase economic efficiency. The theory of the second best states that if there is some unavoidable market distortion in one sector, a move toward greater market perfection in another sector may actually decrease efficiency.
Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that maximises a social welfare function subject to economic constraints. [1] The social welfare function used is typically a function of individuals' utilities , most commonly some form of utilitarian function, so the tax system is chosen to ...
In law and economics, the Coase theorem (/ ˈ k oʊ s /) describes the economic efficiency of an economic allocation or outcome in the presence of externalities.The theorem is significant because, if true, the conclusion is that it is possible for private individuals to make choices that can solve the problem of market externalities.
An equity-efficiency tradeoff appears when there is some kind of conflict between maximizing the equity and maximizing economic efficiency. The trade-off between equity and efficiency is at the heart of many discussions of tax policy. Two questions are debated. First, there is disagreement about the nature of the trade-off .
The Williamson tradeoff model is a theoretical model in the economics of industrial organization which emphasizes the tradeoff associated with horizontal mergers between gains resulting from lower costs of production and the losses associated with higher prices due to greater degree of monopoly power.