Question

Most government interventions are designed to modify market outcomes, and the aim is usually to improve economic welfare. However, some interventions are specifically motivated purely by political considerations. For this task, we will consider political intervention in the labour market in Venezuela. This case study comes from the article by: Chang-Tai Hsieh, Edward Miguel, Daniel Ortega, and Francisco Rodriguez. 2011. The Price of Political Opposition: Evidence from Venezuela’s Maisanta, American Economic Journal: Applied Economics 3: 196–214.

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Note that the analysis in this reference is advanced and you do NOT have to read the entire study to complete the assignment. You should, however, read pages 196-198.

1. Figure 1 on page 197 of the Hsieh et al. (2011) article shows that over one million voters who signed a petition to remove President Hugo Chávez from office were discriminated against and experienced a drop in their wages and employment. Use demand and supply analysis to illustrate this situation.

2. With the aid of a diagram, discuss the impact this political event is likely to have had on Venezuela’s production possibilities and economic welfare.

Answer 1