Assume political power such that we have to make a transfer of $X to each worker in a certain industry. This could be done by:
- Giving each worker now in the industry $X
- Giving $X to all current and future workers
- Giving an employment subsidy that raises wages by $X
- Giving a production subsidy that raises wages by $X
- Imposing a tariff that raises wages by $X
In terms of welfare ranking, 1>2>3>4>5
But, why do most countries choose 5 even if in terms of welfare 1 is better?
Possible reasons:
- Pro-revenue bias
- Commitment mechanism: deliberately use inefficient income redistribution to impose self-restraint
- Uncertainty, ignorance
- obfuscation (?)
- terms of trade
Source: Krugman
