unit 10

Question 1

the realistic world of second best

Answer 1

distortions:

market failure
government intervention

Question 2

externalities - definition

Answer 2

when a transaction between a buyer and seller directly affects a third party

Question 3

externalities x2

Answer 3

are an important source of market failure that we experience every day, although we may not be aware of it

Question 4

negative externality

Answer 4

impact on the bystander is adverse

Question 5

positive externality

Answer 5

impact on the bystander is beneficial

Question 6

Externalities as an example: pet market

Answer 6

The sellers are the pet stor

The buyers are the people willing to buy/ looking at the pets

Question 7

Specificity Rule x1

Answer 7

If an externality is present, government policy should intervene as direct as possible on the specific source of the externality, to most enhance national economic efficiency

Question 8

Specificity Rule x2

Answer 8

if a country has some other objective, movement policy should intervene as direct, to minimise the national economic cost of achieving the other objective 8that is, to mimics the amount of economic inefficiency created)

Question 9

Specificity Rule x3

Answer 9

Key: identify the specific problem clearly, then use a policy to attack the problem directly

Question 10

Arguments for and against protection

Answer 10

promoting domestic production or employment

Question 11

Arguments for and against protection

Answer 11

• the infant industry argument
• the dying industry argument
• the developing government argument

Question 12

Arguments for and against protection - non economic

Answer 12

• national pride
• national defence
• income redistribution

Question 13

Promoting domestic production or employment

Example.

Answer 13

a tariff could be used to increase domestic production, so it may be better than doing nothing, but it is not the direct policy, bc it acts on imports directly, not on domestic production

Question 14

Promoting domestic production or employment

Example.

Answer 14

• the best gov policy is a subsidy to domestic production

- domestic production is increased, correcting the distortion

Question 15

Promoting domestic production or employment

Example.

Answer 15

the production subsidy is better bc it doesn’t dispirit domestic consumption

Question 16

Promoting domestic production or employment

Example.

Answer 16

a tariff would squeeze some customers out of buying, resulting in the inefficiency of the consumption effect

the tariff is indirect and not the best policy to address the production distortion

Question 17

other non economic

Answer 17

also apply the specificity rule:
if the gov has a noneconiomic objective, the government policy to achieve this noneconomic objective with the least economic cost is usually the policy that acts directly to achieve it instead of using tariff/non-tariff barriers to trade