By Mohammad Ashraf (auth.)
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Additional resources for Formal and Informal Social Safety Nets: Growth and Development in the Modern Economy
Sample text
Tomatoes are an asset. They carry a certain value. Suppose a farmer has two tons of tomatoes. She wants to buy a new tractor, but she wants to wait till next year. Her current tractor is expected to run fine for another year. If she leaves this crop of tomatoes in the field, they will rot and become worthless by next year. She may want to store tomatoes in a cold storage facility, but this is an expensive option. At least some of the value of tomatoes will be used up in storage fees. Currency, by the way, runs into the same problems if prices are increasing rapidly.
Should the subsidizing government even care about this question when making subsidy decisions? Note that subsides are negative taxes—government pays the firms/individuals for participating in an activity. Richard Gretz et al. (2009)45 developed a two-country twofirm model to get some insight. Their results lead them to conclude that the firms of the “home country”—the country that is subsidizing its firms—will benefit whether or not the other country provides subsidies to its firms. To get a deeper insight, one may create a finer division of government support for R&D into a number of sub-categories.
It relies on the Theory of Comparative Advantage. 1. Comparative Advantage and Specialization Imagine a hunter-gatherer economy and a situation where there is only one individual. Let us call her Sara. To survive, Sara will need food and shelter. Imagine that she spends half of the day gathering food and the rest of the day gathering wood to build shelter. For the purposes of this example, assume that the shelter is temporary and is used only for one night; in the morning she moves on in search of food and abandons the shelter she built the night before.