Tuesday, February 16, 2010

Rodrik's paradox!

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:

  1. Giving each worker now in the industry $X
  2. Giving $X to all current and future workers
  3. Giving an employment subsidy that raises wages by $X
  4. Giving a production subsidy that raises wages by $X
  5. 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

The Sun as a Natural Dryer!

Source: The Kathmandu Post