IBE 3

11 flashcards · Other · by Daniel F.

1. First-best world vs second-best world

   First-best no externalities no need for government interference Second-best (real world) Positive and or negative externalities If there is too much or too little activity there needs to be taxes and subsidies to correct it

2. Specificity rule

   Address the externality in the most direct and most efficient way INSTEAD of trade protection

3. arguments for trade protection - Employment

   Protecting the import competing sector raise domestic production and employment social benefits may be higher than DWL Specificity rule - Direct production subsidy is more efficient, does not decrease CS

4. arguments for trade protection - Infant industry

   (temporary) protection from import competition gives domestic industry time to become more competitive Import barriers bring benefits of more cost-effective production in the future, but welfare losses today good if future profits are more than current losses

5. Infant industry - counter argument

   if future gains are certain firms should borrow money direct measures (e.g. provision of loans, production subsidies, R&D subsidies) will have similar effect on producers without losses for consumers Hard to identify the key industries that have the potential to “grow up”. Difficult to reduce protection at later stage

6. arguments for trade protection - government revenue

   Import tariffs increase government revenue Benefits of better public goods provision may outweigh deadweight losses from tariffs

7. arguments for trade protection - Influencing the income distribution

   Government may be interested in using import barriers to influence the income distribution Specificity rule: Direct income transfers more efficient can achieve the same income distribution without price distortions

8. arguments for trade protection - strategic behavior

   Import barriers shift profits from foreign producers to domestic producers -> increase in market share. Long-term increase in market share may have benefits that outweigh the normal deadweight losses. Specificity rule : Direct production subsidy or loans to cover temporary losses more efficient -> increased production without reduction in consumer surplus

9. Political economy of trade barriers

   under direct voting more consumers vote against tariff/NTB under elected representatives the better lobby wins Sometimes better organized small groups win, and that is economically inefficient

10. How are real life tariffs different from the ones in the model

    not always imposed on the final good firms have to reorganize supply chains, costly production itself becomes more expensive lower profit margin, higher prices or both

11. how can firms react when tariff is imposed on inputs

    Switch to domestic suppliers. Switch to other foreign suppliers. In case of imports from firm’s own subsidiaries: Relocate production to other countries. US jobs are lost Relocate U.S. production to other countries that don’t have import tariffs.