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Optimal Subsidization and Structural Change under Monopolistic Competition with Technical Progress a la Ethier

Ziesemer, Thomas (1990): Optimal Subsidization and Structural Change under Monopolistic Competition with Technical Progress a la Ethier.

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Abstract

The North produces differentiated intermediate factors in monopolistically competitive firms.North and South produce consumption goods using the finite number of factors. The world optimum can be achieved through a combination of ad valorem and specific production subsidies, which converges to a simple rule of thumb for a large number of firms. A widening of markets leads to a larger number of firms, a higher ad valorem subsidy and a lower specific subsidy, and has no impact on the optimal size of firms.If population growth is higher in the South than in the North a higher share of intermediates will be exported to the South, production of consumption goods will grow faster in the South than in the North and employment in the North will shift to the intermediate sector. If the North pays the subsidies alone there will be a redistribution from North to South, which may make subsidies an issue of international negotiations.

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