It has been argued that the fiscal equalization process in Australia,
which transfers wealth between States, has efficiency costs. Here, I s
how that equalization transfers can be efficiency enhancing. Further,
it is shown that under certain assumptions about inter-state differenc
es 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 St
ates, such as Victoria and New South Wales.