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Welfare effects of regional policy in the constructed capital model
(Tartu University Press, 2010-02-19T10:11:30Z) Tafenau, Egle
Regional issues have recently received a lot of attention by economists, especially the case of the EU where regional inequalities are expected to increase in the course of deepening integration. Since the mid-1990s, the discussion of the effects and tools of regional policy relies often on the models of the new economic geography (NEG), which also predict an increase of regional disparities in response to decreases in trade costs. The dissertation aims to evaluate the desirability of regional policies from the viewpoint of the society as a whole based on the constructed capital model with asymmetric regions. In reviewing the models of NEG, it is concluded that they are applicable for policy relevant analysis as the results hold over a wide variety of assumptions and there is empirical evidence for their relevance in the real world. Further it is argued that the objectives of regional policy are often unclear in practice, though justified with reducing inequality and improving efficiency. Also based on the NEG regional policies can be justified with both of these arguments as the spatial distribution of economic activities achieved as the market outcome might not correspond to the socially preferred one. In spite of that, the ways of achieving a specific spatial distribution of economic activities has not gained sufficient attention in the NEG literature. Finally it is shown that social desirability of a simple policy of subsidising capital and taxing consumption expenditures depends on the underlying welfare concept and that subsidising the richer region instead of the poorer one might be preferred from the viewpoint of the whole society. Policy tools that barely directed to redistribution might not increase social welfare. Therefore, in implementing regional policies caution is needed.