Exam 2 Flashcards
tariff types
specific (dollar amount)
ad valorem (percentage)
effects of tariff
PS increase
CS decrease
GR increase
welfare: large ?, small loss
effects of Export Subsidy
PS increase
CS Decrease
GR decrease
Welfare decrease
effects of import quota
PS increase
CS decrease
GR depends on if they charge for rents
Welfare: large ?, small loss
Case for Free Trade
efficient
best feasible political move
economies of scale
Case Against Free Trade
optimal tariff amount (ignore likelihood of retaliation)
domestic market failure
social, environmental losses
theory of second best - tariff can offset losses
Median voter theorem
politicians try to get the majority of voters - aim to go to the middle (which is usually protectionist)
collective action problem
people care more if they have a lot at stake
preferential trading agreement
illegal
lowers tariffs for eachother, but not the rest of the world
2 types of trade agreements
free trade area: free trade within countries, own policies with others
customs union: free trade among members, common external policies
Trade diversion v creation
diversion: low cost imports from non members diverted to high cost imports from members
creation: high cost domestic production replaced by low cost imports from members
Import Substituting Industrialization
infant industry
(know thai example)
firms have low incentives to keep prices low - often leads to domestic market failures
Open/Size relationships
In open markets, size doesn’t matter
in closed markets, size matters
for small countries, open is better
for large countries, doesn’t matter as much
