The Optimal Rate of Decline of an Inefficient Industry

Ray Rees and B. A. Forster

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: This paper considers the problem of the optimal time path of contraction of an industry which has been hit by foreign competition, and shows that in general, along the optimal path, a production subsidy is warranted. The optimal subsidy trades off the benefit of unemployment in speeding up the approach to the new long-run equilibrium against the cost of lost output in the ‘inefficient’ industry. The dynamic shadow price of labour in this industry is also derived and shown to be always positive, though below the industry wage rate

Date: 1983
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Published in Journal of Public Economics 2 22(1983): pp. 227-242

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Journal Article: The optimal rate of decline of an inefficient industry (1983)
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