Policy makers should stick to rules instead of pursuing discretionary polices. Do you agree with the above statement? Substantiate your answer.

No, not agreed with th above statement because Policy-makers do not want people to build homes in floodplains. To discourage such building, they announce that anyone suffering flood damage is on his own—no disaster relief will be forthcoming. People ignore these warnings and build anyway. Then, the rain comes, the water rises and the homes flood.

The media carry heart-wrenching footage of rooftops poking out of roiling currents. Following a public clamor, policy-makers announce a bailout—100 percent compensation for flood-related damage. This result offers the worst of both worlds—homes are destroyed by floodwater, and victims who ignored warnings are indemnified with taxpayer funds. After the floodwater has receded and the disaster checks have gone out, the cycle starts all over again. How can policy-makers avoid this trap?

Economists Finn Kydland and Edward Prescott were the first to offer a way out.1 In a classic 1977 article, they introduced a distinction between time-inconsistent and time-consistent policy. A time-inconsistent policy may make the public happy in the short run but will ultimately fail to produce the long-run policy goal. A time-consistent policy, in contrast, nails the long-run policy goal _________ _________ ________ ____ ______ _________ ____.
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