Session 3

Question 1

Explain the idea of optimum tariff rate + how it might justify protection

Answer 1

It stands for that level of tariff at which trade gain terms are highest. Optimum tariff rates can be used as advantage.

Question 2

Explain the argument of domestic market failure + how it might justify protection

Answer 2

When Supply&demand don’t lead to market satisfaction (first best), trade restrictions (e.g. tariffs) can increase domestic welfare

Question 3

Name and critically discuss further pros + cons for trade restrictions

Answer 3

Pro:

• Trade policy used strategical
• Leverage of Externalities of Tech.

Con:

• Government needs many infos for successful implementation
• benefit of free trade gone
• dynamic advantages (competition, innovation)
• public choice argument

Question 4

What does the effective rate of protection do?

Answer 4

The effective rate of protection calculates the net effection of trade measures for a country with all elements of value chain protection rates considered.

Question 5

What is the effect of Trade policy measures?

Answer 5

In the introducing country they lead to:

• Price increase
• traded quantity decrease int.

Large countries trade gain may outweigh the distortion effect but not in small ones.