第10章Arguments for and against Protection.pptVIP

Chapter Ten Arguments for and against Protection Arguments for and against Protection Free trade leads to a fully efficient outcome for the world. Trade barriers bring net harm to the world economy. Nationally optimal tariff good for the country, but loss to the world. The effects of a tariff or nontariff barrier Increase domestic production of the product Increase employment of labor and other resources in this domestic production Decrease domestic consumption of the product Increase government revenue Alter the distribution of income or well-being in the country. Arguments in favor of tariffs or NTBs The ideal world of first best Demand and supply curve do double duty, representing both private and social benefit or costs P=MB=MC=SMB=SMC Invisible hand The realistic world of second best Externalities or spillover effects External costs: some costs of producing or consuming are ignored by the private decision- makers, too much produced or consumed External benefits: some benefits of the activity are ignored by the private decision- makers, too little of the activity occurs The realistic world of second best Tax: to create a distortion by artificially rising the price to buyers. Subsidy: to create a distortion by artificially lowering the price to buyers. Government policies toward externalities Market failure Fix distortions caused by externalities: 1. government’s ability to cure: tax or subsidy 2. property-right approach: new private-property institutions Government failure Government policies toward externalities If SMCMC=P=MB=SMB, levy a tax of (SMC-SMB), increasing the price. If SMBMB=P=MC=SMC, pay a subsidy of (SMB-SMC) The specificity rule Identify the specific source of the problem and intervene directly at this source. Cut against import barriers. The extra social benefits to domestic production or employment in the import-competing industry Spillover benefits to other industries Employment imparts skills and attitudes The extra costs for worker