5. General Equilibrium Analysis A large public project increases the price of labor (wage rate) in a region of the
a. If the labor market is perfectly competitive and the economy provides an efficient allocation of resources prior to the project, do we need to consider the general equilibrium effects of the project or is a partial equilibrium analysis sufficient? Explain
b. Now assume that the government currently provides a generous public assistance program that discourages work and leads to a high level voluntary unemployment. Does the project's wage effect make the project more socially desirable, less socially desirable, or have no effect. c. What is the theory of the second best? How does your answer to part b relate to the theory of the second best.
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