Chapter

Rural–Urban Prices in Open Economies

Raaj K. Sah and Joseph E. Stiglitz

in Peasants versus City-Dwellers

Published in print February 2002 | ISBN: 9780199253579
Published online January 2005 | e-ISBN: 9780191601682 | DOI: http://dx.doi.org/10.1093/0199253579.003.0004
Rural–Urban Prices in Open Economies

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An analysis is begun of the basic question of how the burden of financing economic development in less developed countries (LDCs) should be shared between those in the urban and rural sectors. An economy is considered that can trade at fixed international prices with the rest of the world, and in which there is a tax border between the urban and rural sectors. The latter assumption indicates that the government can impose different sets of taxes in the two sectors and, as a result, market prices in the two sectors can differ. In such an economy, the question posed above turns out to be equivalent to asking what the relationship should be among prices received by farmers, prices paid by city-dwellers, and international prices. The analysis presented is based on the simplest model that can highlight the central trade-offs involved in taxing or subsidizing the rural and urban sectors, and abstracts from intra-sectoral heterogeneity of individuals and goods, from inter-sectoral flows of factors such as labour and capital, and from the effects of prices and wages on productivity; the basic model has rural peasants selling their agricultural surplus in order to buy industrial goods.

Keywords: agricultural surplus; capital; city-dwellers; economic development; farmers; industrial goods; international prices; labour; less developed countries (LDCs); market prices; models; open economies; peasants; prices; productivity; rural prices; rural sector; subsidies; taxes; urban prices; urban sector; wages

Chapter.  9387 words.  Illustrated.

Subjects: Economic Development and Growth

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