krugman_PPT_c11.rev.pptVIP

Chapter 11 Controversies in Trade Policy Preview Arguments for “activist” trade policies Externality or appropriability problem Strategic trade policy with imperfect competition Arguments concerning trade and people (not required) Trade and labor Trade and the environment Trade and culture Arguments for an Activist Trade Policy An activist trade policy usually means government policies that actively support export industries through subsidies. Arguments for activist trade policies use an assumption that import substituting industrialization (chapter 10) and the cases against free trade (chapter 9) used: market failure. Externalities or an appropriability problem Imperfect competition that results in monopoly or “excess” profits. Technology and Externalities Firms that invest in new technology generally create knowledge that other firms can use without paying for it: an appropriability problem. By investing in new technology, firms are creating an extra benefit for society that is easily used by others. An appropriability problem is an example of an externality: benefits or costs that accrue to parties other than the one that generates it. An externality implies that the marginal social benefit of investment is not represented by producers surplus. Technology and Externalities (cont.) Governments may want to actively encourage investment in technology when externalities in new technologies create a high marginal social benefit. Should the US government subsidize high technology industries? Technology and Externalities (cont.) When considering whether a government should subsidize high technology industries, consider: The ability of governments to subsidize the right activity. Much activity by high technology firms has nothing to do with generating knowledge: subsidizing equipment purchases or non-technical workers generally does not create new technology. Knowledge and innovation are created in industries that are not usually classified as high tech. Technology an