Arbeitspapier
Optimal Policy under Restricted Government Spending
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.
- Language
-
Englisch
- Bibliographic citation
-
Series: Working paper ; No. 8-2006
- Classification
-
Wirtschaft
Policy Objectives; Policy Designs and Consistency; Policy Coordination
Planning Models; Planning Policy
One, Two, and Multisector Growth Models
- Subject
-
welfare ranking
indirect and direct policy instruments
restricted government spending
- Event
-
Geistige Schöpfung
- (who)
-
Sørensen, Anders
- Event
-
Veröffentlichung
- (who)
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Copenhagen Business School (CBS), Department of Economics
- (where)
-
Frederiksberg
- (when)
-
2006
- Handle
- Last update
-
10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Sørensen, Anders
- Copenhagen Business School (CBS), Department of Economics
Time of origin
- 2006
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