Optimal Intervention to Achieve Non-Economic Objectives

Bhagwati, J.N.; Srinivasan, T.N.
January 1969
Review of Economic Studies;Jan69, Vol. 36 Issue 1, p27
Academic Journal
International trade theorists have been almost alone in considering seriously the question of devising the optimal economic policy when social utility, defined as a function of the currently available flow of goods and services, cannot take the maximum value that is attainable within the framework of technological, resource and trading opportunities, owing to constraints provided by "non-economic" objectives. Four major varieties of non-economic objectives can be distinguished: (1) the output level in specific activities may be considered to be of strategic importance and hence may not be allowed to fall below specified magnitudes; (2) self-sufficiency, that is, the value of imports (or exports, under balanced trade), may be considered to be sufficiently strategic to entail that its level not exceed a specified magnitude; (3) factor employment in certain activities, for example labour in agricultural activities, may be considered vital for defence or "national character" and hence may not be allowed to fall below specified levels; and finally (4) domestic availability of certain commodities may be considered to be relevant to "social policy", requiring that it not exceed certain specified levels, as for example with "luxury" consumption. In each of these cases, the question of maximizing social utility becomes a problem in the theory of the second-best, for each such non-economic objective constitutes an additional constraint subject to which the social utility function would be maximized. And corresponding to each such constrained solution, there is an optimal form of policy intervention that will enable a competitive system to maximize social utility. This paper is addressed to an analysis of the optimal policies, when the economist is faced with these non-economic objectives (each taken in turn, during the ensuing analysis). Throughout, the model assumed involves two primary factors, two final outputs, production functions embodying constant returns to scale and diminishing returns along isoquants, a well-behaved concave social utility function, and fixed supplies of factors of production. In Section I, it is also assumed that there is no monopoly power in trade, so that the external terms of trade are fixed throughout the analysis. This assumption is relaxed in Section II. The analysis involves the derivation of necessary (and under our assumptions, sufficient) conditions for a solution to the constrained maximum problem implicit in each case. However, all cases in Section I are illustrated diagrammatically as well, so as to bring out the essence of the analysis more clearly. It can be shown that an optimum solution exists in all cases, and the analysis will be devoted to a characterization of the optimum solution.


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