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Taxes and subsidies can often distort price signals in an economy. For example, subsidies for auto ...

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Taxes and subsidies can often distort price signals in an economy. For example, subsidies for auto ...

Taxes and subsidies can often distort price signals in an economy. For example, subsidies for auto manufacturing might make the industry relatively more profitable than other activities after the subsidies even though it was not profitable before them. Given this, how might distortionary taxes and subsidies affect an economy's ability to specialize?

▸ Taxes and subsidies would likely have no impact on a country's ability to specialize.

▸ If prices are distorted it will help agents in an economy to move towards whatever their comparative advantage is.

▸ With distorted prices, market forces in an economy may not guide production towards comparative advantage and may cause a country specialize in something else.

▸ Taxes and subsidies would allow a country to specialize in many more things.

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Macroeconomics

Edition: 3^rd

Authors: Acemoglu, Laibson, List

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