Uncertainty and the policy process, Public Economics

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As we know now that in policy process, policy outcome may differ from the social planner outcome not only because different policies may be chosen but because a given policies may have different effects so leading to time inconsistency. Here, the key point is the reaction time. In a dynamic setting, optimal choice of a policy may depend not only on the current state but also on the expectations made for the future. Expectation, both psychologically and technically plays a significant role in determining the forward looking behaviour. When we pose a question, ‘how will forward looking agents behave when, a policy expected in future is crucial for determining current behaviour', we use current information to predict the future.


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