Intersectoral Adjustment and Policy Intervention: the Importance of General Equilibrium Effects

Larry S. Karp, Thierry Paul, Larry S. Karp & Thierry Paul
We model adjustment costs in a general equilibrium setting using a "transport sector". This sector provides services needed to re-allocate a factor of production across two other sectors. A market imperfection in the transport sector causes adjustment to occur too slowly in the absence of government intervention. The government has a restricted menu of second best policies to remedy this imperfection. Given this restricted menu, the optimal policy choice depends on the government's ability to...
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