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Main article: Assignment problem

Assignment Problem (Economic Policy)

Allocation of resources through the maintenance of the government budget. (Fiscal Policy)

Assignment problem is an economic problem where the main focus is to allocate resources to a range of activities in order to reduce total costs or expand total profits. Assignment problem occurs due to available resources having their own exclusive ways of performing different activities, which varies costs, profits and losses. Some real life examples of assignment problems being utilized are assignments of workers to different work stations such as the line-production of fast food employees. Governments solve assignment problems through the implementation of economic tools such as monetary and fiscal policies to achieve the desired economic objective levels. For example, the main instruments for monetary policies are interest rates and the money supply. Economic theory and real-world evidence suggests that these instruments are closely linked to the inflation rate, hence, the assignment rule would state that inflation control is the main objective of monetary policies.

Formal Definition

An “assignment problem” in economics is finding the most optimal way to allocate economic resources within the market, which cannot realistically be shared between two locations or sectors, nor easily moved between them.

Assignment problems is analysed by various cost-benefit options for the allocation of resources. The costs and benefits depend on the exact problem, and there may also be hard restrictions limiting available options (it may not just cost too much to put something somewhere, it may in fact be illegal, or impractical). The goal is to arrive at an optimal or near-optimal answer in an acceptable time-frame.

The assignment problem can be understood as the distribution of rights to the individuals and groups of a society. This general interpretation can be explained through three different examples i) the allocation of property rights to individuals, i.e. households, and to firms, ii) the allocation of decisions rights to the government relative to the private sector, and, iii) the attribution of policy instruments to economic policy agents. i.e. Central Bank, and Trade Unions.

We can think of the assignment problem as an optimising problem in which decision rights are allocated in such a way that a goal function is maximised. In this fundamental issue of institutional economics, the goal function is complex, as it includes values such as Human Development Index as well as measurable goals such as GDP Growth and Inflation, which often causes a conflict in objectives.

Economic Tools (Monetary and Fiscal Policy)

Economy of China

Currency	Yen
Statistics
GDP	14,172.20 Billion
GDP rank	2
GDP growth	6.18%
GDP per capita	$10,099
GDP per capita rank	72
All values, unless otherwise stated, are in US dollars.

Economic policies are a set of rules and regulations set out by the government in order for them to control the behavior of the economy. These rules and regulations generally comprises of two main tools, fiscal policy, which are decisions about the government’s budget about spending and taxation, as well as monetary policy, which involves instruments like interest rates, to manage the supply of money in circulation.

Monetary policy have been the main tool that governments have used to observe the economy's stance. Through low interest rates, monetary policies stimulate the economy by offering individuals and businesses a low price to borrow and spend, ultimately leading to GDP growth. Conversely, a high interest rate would deter consumers from doing so, allowing this to be a tool to control inflation, a negative consequence from a rapidly economy.

Open market operations, reserve requirement regulations, and discount rates are the main monetary instruments that the federal government uses to control the money supply. Open market operations enables the government to buy and sell bonds to the market which directly influences the money supply in circulation. Reserve requirement regulations directly influences the money created as it inhibits banks from loaning out more than they can. The Fed can also change the discount rate, which aims to revise the short-term interest rate due to market forces.

On the other hand, fiscal policies aims to allocate its spending into different industries efficiently whilst maintaining enough revenue to do so. The main instruments that are used are changes in government spending decisions and taxation rates.

If economic growth levels aren’t as desired, governments may turn to ‘stimulus spending’, giving individuals or businesses in the economy an incentive to spend, mainly by giving them monetary incentives. ‘Deficit spending’ occurs when there are not enough tax receipts to pay for the spending increases and governments turn to borrowing money, usually through issuing debt securities. Vice Versa, if an economy is growing too rapidly, governments may increase tax on individuals, which negatively affects the demands of goods and services in the economy. Influencing economic conditions through fiscal policy is one of the core principles of Keynesian economics. Consequently, if the economy is near full capacity, expansionary fiscal policy may result in inflation. This inflation deteriorates corporation profits in competitive industries as well as individuals on a fixed income.

Economic Objectives

GDP Growth of Pakistan from 2012-2018.

Economic objectives are targets that the government wants to achieve. There are many objectives that they try to achieve, with the main objectives being;

1.      Economic growth: Incomes of all consumers and firms (after accounting for inflation) are increasing over time.

2.      Full employment: Every member of the labour force who seeks work is able to find work.

3.      Price stability: Prevent large increases in the general price of goods and services known as inflation, as well as decreases in the general price level known as deflation.

However, in most cases, there will always be a conflict of trying to achieve these objectives. One of the main conflicts are with economic growth and price stability, also known as inflation. This is a similar conflict as unemployment and inflation where a rapidly growing economy will typically face inflationary pressures due to demand being greater than supply. Hence, greater aggregate demand would cause businesses and firms to have difficulty in employing sufficiently skilled labour, resulting in a shortage of labour, ultimately leading to a wage-price spiral.

Another conflict amongst objectives can be shown through economic growth with economic degradation. Past experiences have shown that a higher GDP growth usually results in higher levels of pollution due to consumption on non-renewable resources. This can be avoided through the implementation of natural resources such as wind and solar energy.

Ultimately, the assignment problem correlates with these objectives as governments will need to assign economic tools to efficiently manage these objectives. In this case, governments may use the 'dual-mandate' approach, where they target two objectives simultaneously, or the 'hierarchical mandate' approach, where they prioritise an objective over another.

Examples

Example of resource allocation being divided between different individuals.

An example of the assignment problem is the government allocating its budget into different industries, in order to achieve the maximum output. The Australian government recently announced a $100 billion transport infrastructure investment in the next decade in order to improve delivery times and help workers get to job sites quickly.

Another example is the use of monetary policy, where the RBA has announced to keep the cash rate unchanged at 1.5%.

References

1.      Siebert H. (2001) The Assignment Problem. In: Berninghaus S.K., Braulke M. (eds) Beiträge zur Mikro- und zur Makroökonomik. Springer, Berlin, Heidelberg

2.      Enders, Walter and Lapan, Harvey E., "The Assignment Problem and the Speed of Adjustment" (1979). Economic Staff Paper Series. 100.

3.      Segal, Troy “Monetary Policy vs Fiscal Policy: What’s the Difference?” Investopedia February 21 2019

4.       Pettinger, Tejvan. “Macroeconomic objectives and conflicts” Economics Help. July 9 2017

5.      Gokarn, Subir “The assignment problem” Business Standard July 14, 2013. 21:50 IST https://www.business-standard.com/article/opinion/the-assignment-problem-113071400693_1.html