Week 6 - Chapter 10: Arguments for and against protection

Question 1

Arguments for tariffs

Answer 1

Protecting domestic production industries

Protecting employment in the import competing industry

Protecting domestic consumers from low quality products

Increased government revenue

If its is desirable to enhance the incomes of factors used intensively in the import computing industry

Question 2

First best world

Answer 2

All private incentives are aligned perfectly with the benefits and costs to society as a whole, there are no positive or negative externalities that are unaccounted for

Question 3

Based on the first best world, what does price equal to?

Answer 3

Price (P) = Buyers’ private marginal benefit (MB) = Social marginal benefit (SMB) = Sellers’ private marginal cost (MC) = Social marginal cost (SMC)

Question 4

The realistic world of second best

Answer 4

We live in a second best world, one that includes distortions resulting from gaps between private and social benefits or costs of an activity. Private actions will not lead to the best possible outcomes for society

Question 5

Sources of distortion for the realistic world of second best

Answer 5

Market failures

Government policies

Question 6

Market failures

Answer 6

When private markets fail to achieve full economic efficient

Question 7

Government policies can distort by:

Answer 7

Can distort an otherwise economically efficient private market

Question 8

Types of distortion

Answer 8

External costs

External benefits

Monopoly power

Monopsony power

Distorting tax

Distorting subsidy

Question 9

External costs

Answer 9

Too much is supplied because suppliers make and sell extra units for which the social costs exceed the price

Question 10

External benefits

Answer 10

Not enough is demanded, demanders receive only private benefits equal to the price, not the full social benefits

Question 11

Monopoly power

Answer 11

Not enough is demanded because the monopoly sets the price too high

Question 12

Monopsony power

Answer 12

Not enough is supplied because the monopsony sets its buying prie too low

Question 13

Distorting tax

Answer 13

Not enough his demanded because the tax makes the price to buyers exceed the revenue per unit received by supplies

Question 14

Distorting subsidy

Answer 14

Too much is demanded because the subsidy makes the price to buyers lower than the revenue per unit received by suppliers

Question 15

Tax or subsidy approach

Answer 15

Suggests to spot distortions in people’s and firms’ private incentives and have a wise government policy correct the incentives with taxes or subsidies

Question 16

Specificity rule

Answer 16

States that it is usually more efficient to use the government policy tool that acts as directly as possible on the source of the distortion separating private and social benefits or costs

Question 17

Pros of a tariff to promote domestic production or employment

Answer 17

Local production of this product produces spillover benefits because other firms and industries benefit form the production know how or management techniques introduced by the firms in the is industry

Employment in this industry provides new worker skills and attitudes which workers can carry with them when they switch jobs

Question 18

Infant industry argument

Answer 18

Asserts that a temporary tariff is justified because it costs down on imports while the infant domestic industry leans how to produce at low enough costs

Question 19

In which cases is government policy needed?

Answer 19

There are imperfections in the financial markets

The benefits form the early business investments do not accrue to the firms making these early investments

Question 20

There are imperfections in the financial markets

Answer 20

Financial institutes such as banks and stock markets may be underdeveloped and therefore unwilling to take on any sort of risk