Proposed Policy to Improve Food-Cart Industry in Dirksville
The business environment in Dirksville is perfectly competitive, and firms in the food cart industry have identical production technology. There is a large supply of labour willing to work for $10/hour and no barriers to entry (Lombardi, Skans & Vikström, 2018). It means the elasticity of labor supply is infinite, and the subsidy would not affect firms’ hiring decisions. Entry to the Dirksville market is free, and there is a large number of potential entrepreneurs who might want to get into the food truck business. In this case, the best policy to introduce is to make the food truck industry more profitable to earn an economic profit. It would attract new entrants into the market and increase employment opportunities there.
As for firm owners, there is no doubt that some marginal food-cart owners would be better off because he has to pay fewer taxes per year and have the capacity to hire more workers (Collischon et al., 2021). But at the same time, he has to increase his business size, which will result in an overall output in Dirksville’s food-cart industry growing more than proportionately. In other words, “a larger pie with smaller slices. Increased food production reduces food costs and raises the people’s real incomes in Dirksville. It also expands the tax base, permitting greater public expenditure with no increase in taxes.
As many industries hire more employees, the tax base will increase, and the government will have more money to spend without increasing taxes. It could be used to improve the city’s infrastructure, which would benefit the food truck industry. It will also attract more entrepreneurs to enter the food-truck market (Lombardi, Skans & Vikström, 2018). The government, in turn, can pump money directly into the food truck industry by providing subsidies to firms, or it can indirectly help the industry by improving infrastructure and making the city more appealing to live in. Increased public expenditure will also benefit employees in the food truck industry by providing more opportunities to work in a healthier and better environment.
In equilibrium, each firm earns zero economic profit. The proposed policy would shift the industry to a new equilibrium where all firms earn positive economic profits (Kianfar, 2019). The government can introduce wage subsidies to support firms’ hiring capacity and reduce unemployment. It will also see employees earn higher wages and increase consumer surplus. Higher incomes will pose two effects on the government’s budget. First, higher wages will increase income tax revenue for the government and reduce social assistance expenditures by a smaller amount (due to lower unemployment rates). Second, there would be an increased demand for public goods such as education and transportation, resulting in higher taxation with no change in labour taxes or reduction of subsidies. The policy may also increase the demand for housing, leading to an appreciation of land prices in Dirksville city.
The policy will contribute to shifting the tax burden from labour to capital, making the economy more efficient in the long run. In the long run, capital will be allocated to its most productive uses, which will increase the level of output in the economy. The government can also provide a lump-sum transfer to all food truck workers to improve their living conditions. The subsidy would be effective in increasing employment opportunities and improving the living conditions of the workers who are currently making very low wages.
The policy will reduce labour supply elasticity and increase the elasticity of labour demand. This will decrease the unemployment rate and increase in the number of employed workers in Dirksville city (Ghoddusi et al., 2021). The proposed food truck industry subsidy is an example of a green Keynesian fiscal stimulus, which can respond to credit or output gaps when the economy is operating below the potential GDP level. The key difference between this policy and traditional IS/LM models is that it has a higher income elasticity of demand for goods and services, leading to higher levels of economic growth.
The policy improves the redistribution of incomes by transferring the rents to low-skilled workers. It also increases economic efficiency because of higher worker productivity, which would lead to an increase in GDP level and inflation rate within Dirksville city (Kianfar, 2019). The policy can be used as a counter-cyclical tool during an economic recession or slow down when there is insufficient aggregate demand for goods and services. The food truck industry in Dirksville is currently in an equilibrium where workers are earning very low wages. The proposed wage subsidy would increase the real wages of these workers and encourage more people to enter this industry. This will result in a higher level of output in the economy and increased employment opportunities.
References
Collischon, M., Cygan-Rehm, K., & Riphahn, R. T. (2021). Employment effects of payroll tax subsidies. Small Business Economics, 57(3), 1201-1219.
Ghoddusi, H., Rodivilov, A., & Roy, M. (2021). Income elasticity of demand versus consumption: Implications for energy policy analysis. Energy Economics, 95, 105009.
Kianfar, K. (2019). Maximizing profit in a supply chain by considering advertising and price elasticity of demand. Computers & Industrial Engineering, 135, 265-274.
Lombardi, S., Skans, O. N., & Vikström, J. (2018). Targeted wage subsidies and firm performance. Labour economics, 53, 33-45.
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Question 
As an economist, in addition to being able to analyze a situation, you will need to be able to communicate your ideas to others. In this writing assignment, you will be acting as an economic policy advisor. Your task is to read the scenario below and do two things: 1) analyze the policy being considered using the analytical tools we have been developing in ECON300, and 2) write a brief, professional memo outlining your policy recommendation.
Proposed Policy to Improve Food-Cart Industry in Dirksville
Scenario:
Mayor McNeill has just taken over as the mayor of Dirksville, a city famous for its lively food-cart industry. All over Dirksville, there are food carts selling all kinds of different cuisines, and the reputation Dirksville has developed as being foody-friendly has been great for tourism. Part of Mayor McNeill’s plan for improving Dirksville is to promote this food-cart culture, focusing on the business aspect. One of his policy advisors has suggested that one way they could promote this kind of industry in Dirksville is to subsidize the wages of food-cart workers: every year, when the food carts submit their taxes to the city, the city would subsidize the hourly wages by $1, which would be deducted from the taxes that firm (food cart) would have to pay that year. Mayor McNeill’s advisor suggested that this would be popular with the people who work in these firms and the firm owners and promote the overall growth of the food-cart industry. Of course, Mayor McNeill is interested in the well-being of these workers, the profitability of the firms, the growth of the industry, and the city’s overall finances.
Mayor McNeill’s office has hired your consulting firm to look into the matter further and provide some guidance as to whether implementing this subsidy would be a good idea overall and, specifically, who benefits from this policy. Your firm has done some preliminary research and discovered the following things: firms in the food cart industry (regardless of what kind of food they are selling) are perfectly competitive and have the same production technology (cost structure). That is, each firm is essentially identical. There is a large supply of labour in Dirksville willing to work at the (currently) prevailing wage rate of $10/hour – so large, in fact, that firms have no problem finding workers willing to work for $10 per hour (which would continue to be true even if they hired significantly more workers than they currently do). There are no barriers to entry – new food trucks start up all the time. The industry is currently in an equilibrium where firms are earning zero economic profit.
Your task is to think about the proposed policy using the kinds of models we have discussed in ECON300. Notice that this is not a calculation problem – we have not specified the functions you would need in order to perform exact calculations – instead, we want you to think of this more generally. What would happen in this market if we implement this subsidy in the short run? In the long run? Who benefits from this policy?
Instructions:
Your task contains two parts: an analysis and a cover letter.
Analysis: In this section of your writing assignment, you should analyze the above scenario using the tools we have discussed in ECON300. You may assume that your audience has also had ECON300. This means that you should model and describe the situation under consideration using the tools we have discussed and analyze the predictions of that model as they relate to the policy objectives. If you arrive at a conclusion about whether the policy is a good idea or not, you should explain your reasoning. If you cannot determine that from what you know, you should explain what you do know and what you would have to consider when making the decision to implement the policy or not. You should be clear about what you are considering when making your policy recommendations and how those factors impact your decision. If you make any additional assumptions (beyond those mentioned above), you should clearly state them and, if relevant, address what would happen if those assumptions do not hold.
Length: Your analysis part of the writing assignment should be approximately 750 words.