Thursday, February 27, 2014

States and Corporate Subsidies

The New York Times has an excellent article on state corporate subsidies (business incentives).  As I demonstrate in class using the demand and supply model, subsidies have a positive effect on producer surplus in that they allow firms to convert lower costs into higher profits, but total welfare (the combined effect of consumers, producers and government) is negative since the costs of the subsidy outweigh the gains to producers and consumers.

This seems to be the question in the article linked above.  Do the gains outweigh the costs in reducing other public services such as education?  While there is no definitive answer, this is an excellent empirical question for economic research -  what are the economic welfare (or economic well-being) from state business incentives.  Additionally, if the answer is positive, then what is the rate of return to the states (or taxpayers) from these incentive packages as compared to the rate of return from other uses of state taxpayer funds?

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