Trade, Extranalities and Public Goods, Government Regulation Flashcards
Absolute advantage
When an economic agent can produce more output than another agent with the same resources
Terms of trade
The “price” of one good in terms of the other; the exchange rate between goods
Arguments against Free Trade
national security concerns, effects of globalization on domestic culture, environmental and resource concerns, infant industries arguments
Protectionism
the view that governments should control trade due
to the harmful effects of free trade
Pecuniary externality
When a market exchange affects other people through market prices
Coase Theorem
Regardless of who has the property rights, private bargaining will result in an efficient allocation of resources
Conditions for Coase Theorem to Hold
1) clearly defined property rights
2) no transaction costs
Private solutions to extranlities
1) Bargaining
2) Doing the Right Thing
Government solutions
1) Command-and-control—direct regulation
2) Market-based policies—provide incentives
Direct regulation
Government mandates the socially optimum quantity and the corresponding price
Market-based policy: Pigouvian tax
1) Per unit tax on the factory,
2) Shifts the marginalcost curve up
3) Shifts the supply curve up/left
Rival goods
Goods that only one person can consume at a time
Non-rival goods
Goods that more than one person at a time can consume
Excludable goods
Must be paid for in order to consume them
Non-excludable goods
Can be consumed, even if they are not paid for
