Resource Rents,Cost Differences and Fiscal Equalization*

It has been argued that the fiscal equalization process in Australia, which transfers wealth between States, has efficiency costs. Here, I show that equalization transfers can be efficiency enhancing. Further, it is shown that under certain assumptions about inter-state differences in costs of production and resource endowments, such transfers may need to favour relatively high cost and resource rich States, such as Western Australia and Queensland, while under other assumptions about diversity, they should favour relatively resource poor and low cost States, such as Victoria and New South Wales.