Welfare Economics, Public Finance and Selective Aid Policies

Abstract

In his justly renowned book on Wirtschaftspolitik, Herbert Giersch develops not only a logic of economic policy, but a perceptive analysis of the problems inherent in any attempt to devise efficient linkages of policy instruments to the range of relevant policy objectives.¹ The theme recurs in much of his later writing, but by now, no doubt, deeply influenced by long, hard experience as one of West Germany’s most distinguished economic advisers. This contribution offers a modest complement to his work, concentrating on an analysis of a policy experience which we share—the problem of preventing government measures designed to correct so-called ‘market failure’ from being characterised by the very sources of failure that they are designed to correct. My thesis is exemplified by selective aid policies which frequently have been justified by economists as suitable instruments for promoting a better allocation of resources than is assumed possible if their allocation is left to the market.