Lecture 3: Arguments against trade
* The job argument
* Trade with other countries destroys domestic jobs.
* Free trade creates jobs at the same time that it destroys them.
* Workers move from the importing industries to those industries in which a country has a comparative advantage.
* The transition may impose hardship on some workers initially; in the long term, the country as a whole can enjoy a higher standard of living.
* The national security argument
* A country should protect industries that are vital for national security.
* Protecting key industries may be appropriate when there ...view middle of the document...
* The threat may not work.
* If it doesn’t work, the country has a difficult choice.
* It can carry out its threat and implement the trade restriction, which would reduce its own economic welfare.
* Or it can back down from its threat, which would cause it to lose credibility.
When do we have an externality problem?
* A lack of clearly established property rights
e.g. overfishing in the ocean; no over-fishing in private fish farms
* Difficulty in enforcing property rights
How can our rights to clean air, water, etc. be effectively enforced?
Private solutions to externalities
* Moral codes and social sanctions
Laws against littering are not vigorously enforced. Most people choose not to litter simply because it is the wrong thing to do.
Private individuals and corporations sometimes sponsor scholarships and prizes for university students
* Vertical integration
* Consider an apple grower and a beekeeper located next to each other. By pollinating the flowers on the trees, the bees help the orchard produce apples. At the same time, the bees use the nectar they get from the apple trees to produce honey.
* When the apple grower is deciding how many trees to plant and the beekeeper is deciding how many bees to keep, they neglect positive externality. Thus, the apple grower plants too few trees and the beekeeper keeps too few bees.
* These externalities could be internalised if the beekeeper bought the apple orchard or if the apple grower bought the beehive.
* The Coase theorem: If property rights are clearly assigned and if transaction costs, are low, then bargaining between relevant parties will result in efficient resource allocation.
* How property rights are assigned affects wealth distribution, but does not affect resource allocation.
* A contract between the apple grower and the beekeeper can solve the problem of too few trees and too few bees. The contract can specify the number of trees, the number of bees and perhaps a payment from one party to the other.
* When does the Coase theorem apply?
* The Coase theorem applies
* If the interested parties can reach an agreement and enforce it.
It may not work if
* The transaction costs – the costs that parties incur in the process of agreeing and following through on a bargain – are so high that no agreement is reached.
E.g., When the number of interested parties is large, it is costly to reach consensus.
Public policies for solving externality problems
* Command and control
Require or forbid certain activities by regulation
* Market-based policies
provide market participants with incentives to take externalities into account in their production and consumption decisions
Corrective taxes and subsidies