Question

I am looking at the Transitional Gains Trap. and at the end, it says that It is very difficult to remove such a policy afterwards because it will reduce net returns to the protected group below normal levels. The benefits are only temporary but as a new group comes into using the policy then they will only earn normal profits.

what does it mean by protected group ? and what it means by  The benefits are only temporary but as a new group comes into using the policy then they will only earn normal profits. ?

Can anyone please explain it in detail? using example would be awesome!

Answer 1

Sometimes, governments of countries, create subsidiaries with a view to increase revenue for a particular industry at large. This is a key macroeconomic policy decision which aims at correcting a particular industry which requires extensive help from the government in order to sustain.

Once the program is implemented, the gains which take place are momentary and any new participant would not see the same levels of profit after a period of time respectively. Therefore, while first movers will get an advantage that they can capitalize on late ones would tend to earn the same profit levels only. However, removing such policies would mean putting the entire population at risk of negative returns to scale which is why the policy is continued for the controlled protected group respectively. These policies are usually very selective and can be explained using the following example.

For example: - A state government were to allow local manufacturers of concessions in growing wheat which is the prime product sold by the state. This can be in the form of tax reforms in land which would allow producers to sell at better rates. Thus the group referred to here is the protected group which is given these conditions as a public tool to address a certain period of time.

After a period of time, if any new entrant were to purchase land from outside, the cost which he would end up paying for the land would neutralize the gains which people are already getting.

Since these gains, are only allowed to the local populations they will be the only ones to benefit from the same as they get benefits in taxes which cannot be handed over to others without them purchasing the property therefore in the example they can be considered as the protected group.

Further, if the government was to lift these policies, it would result in negative returns for the public because they would not be able to sell their products at the same price as the concessions would be lifted.

Conclusion:-

The Transitional Gains Trap happens in policies which are targeted at local populations primarily. These tend to be quick fixes to problems and the governments may find it relatively tougher to remove since this may cause problems for the local population which is said to be the protected group.

These benefits are only temporary in nature. Aimed to help people for a period of time. Like removing state taxes for a couple of years on particular products.

Please feel free to ask your doubts in the comments section.