Widgo, an imaginary agricultural commodity, is the main export of Economia, an imaginary country. Over the years the government of Economia has required private Widgo producers to give an increasingly large share of their production to the state procurement agency as an in-kind tax. The production of Widgo has declined in response to the increasing tax rate on Widgo production. Currently private farmers produce 100 million bushels of Widgo, of which 50%, or 50 million bushels, are required to be turned over to the state procurement agency.
Agricultural economists have established that if the state share of production is reduced to 20%, private farmers will have a greater incentive to grow Widgo, and after a year (the growth cycle for a new crop) the amount of Widgo produced will rise to 300 million bushels. Thus a reduction in the state procurement share from 50% to 20% will lead to a rise in state Widgo procurement from 50 million bushels to 60 million bushels, and an increase in private Widgo exports.
The government of Economia is eagerly searching for new policy initiatives to stimulate the economy and improve the position of the state budget. The state budget has been running a deficit that has been financed by international borrowing at a 15% annual interest rate. Drawing upon the research of its agricultural economists, the government of Economia announces that the procurement quota for Widgo will be reduced to 20% next year.
If private growers believe that this policy initiative will be carried out, they will plant enough Widgo this year to increase Widgo output to 300 million bushels next year. Nonetheless, they are concerned that this policy will not be implemented, and that next year the procurement share will not be reduced. Suppose you were a private Widgo producer. How would you assess likelihood of the government carrying out its announced plans; in other words, how would you assess the credibility of the announced policy? Click on the button corresponding to your evaluation: