Optimal Subsidies to Declining Industries: Efficiency and Equity Considerations
1982 (English)Report (Other academic)
This paper consider equity vs. efficiency in a small economy that subsidizes an industry facing falling world market prices. Subsidies keep up output in the short run when wages and factors are rigid. But once introduced subsidies become permanent, because of pressures from vested interests. This creates misallocation of resources in the long run. An optimal efficiency subsidy balances the short-run gains and long-run losses. It should be raised when prices fall if there is full employment initially and lowered if there is unemployment. An optimal distribution subsidy, which aims at maintaining the sxisting income distribution, should always be raised.
Place, publisher, year, edition, pages
Stockholm: IIES , 1982. , 33 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 199
IdentifiersURN: urn:nbn:se:su:diva-41428OAI: oai:DiVA.org:su-41428DiVA: diva2:330296