Optimal Policy under Restricted Government Spending

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Optimal Policy under Restricted Government Spending

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dc.contributor.author Sørensen, Anders en_US
dc.date.accessioned 2009-02-04T10:27:47Z
dc.date.available 2009-02-04T10:27:47Z
dc.date.issued 2006-11-09T00:00:00Z en_US
dc.identifier.uri http://hdl.handle.net/10398/7581
dc.description.abstract Welfare ranking of policy instruments is addressed in a two-sector Ramsey model with monopoly pricing in one sector as the only distortion. When government spending is restricted, i.e. when a government is unable or unwilling to finance the required costs for implementing the optimum policy, subsidies that directly affect investment incentives may generate higher welfare effects than the direct instrument, which is a production subsidy. The driving mechanism is that an investment subsidy may be more cost effective than the direct instrument; and that the relative welfare gain from cost effectiveness can exceed the welfare loss from introducing new distortions. Moreover, it is found that the investment subsidy is gradually phased out of the welfare maximizing policy, which may be a policy combining the two subsidies, when the level of government spending is increased. Keywords: welfare ranking, indirect and direct policy instruments, restricted government spending JEL: E61, O21, O41 en_US
dc.format.extent 24 s. en_US
dc.language eng en_US
dc.language eng en_US
dc.relation.ispartofseries Working paper;2006-008 en_US
dc.title Optimal Policy under Restricted Government Spending en_US
dc.type wp en_US
dc.accessionstatus modt06nov09 sømamo en_US
dc.contributor.corporation Copenhagen Business School. CBS en_US
dc.contributor.department Økonomisk Institut en_US
dc.contributor.departmentshort ECON en_US
dc.contributor.departmentuk Department of Economics en_US
dc.contributor.departmentukshort ECON en_US
dc.idnumber x656517815 en_US
dc.publisher.city København en_US
dc.publisher.year 2006 en_US


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