1. Discuss the cost of government subsidization and the economic and political r
ID: 1177441 • Letter: 1
Question
1. Discuss the cost of government subsidization and the economic and political rationale behind subsidization.
2. Describe State Owned Enterprises in China. What is their future in China?
3. Discuss what %u201Ccompany culture%u201D means to you and how you would go about developing an ethical culture if you were starting and building a company.
4. The President of your company comes to you and wants to know how you would improve the motivation of your fellow employees. Outline a short plan for answering this question
Explanation / Answer
One basic problem is that, although governments are often motivated to provide subsidies in order to benefit specific groups of people - or, more specifically, voters - they rarely like to be seen doing it through such blatant devices as direct income payments. Activities or things ("merit goods") tend to get subsidised rather than people.
The tendency to subsidize things, instead of helping people directly, contributes to the second, and related, problem, which the economist Gordon Tullock labeled "the transitional gains trap". This refers to the tendency over time for benefits flowing from subsidy programmes to increase the value of associated fixed assets, like land or dairy quotas.
Accordingly, the gains from subsidies tend to be transitional, accruing mainly to those who can immediately take advantage of a new scheme. Their successors end up paying higher prices for farmland, fishing licences, mineral rights. Removing the subsidy thus risks imposing a transitional loss on the subsequent owners of these assets.
Subsidies themselves create a pool of money out of which recipients can influence the very political process that channels money to them in the first place. In many instances subsidies redistribute wealth from a large number of unknowing contributors to a smaller number of beneficiaries. The latter lobby vigorously to defend their handouts; the former seldom bother, or are empowered, to prevent them.
Finally, the bureaucracy itself can present an obstacle. Government ministries rarely admit to having a vested interest in the continuation of the support programmes they administer, but it is hard to imagine total disinterest being the norm. More subtly, the bureaucratization process often feeds a pervasive notion that the subsidised activity forms part of the natural order of things. Subsidies thus metamorphosize into entitlements, and any attempt to curb them becomes politically hazardous.
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