EC239 Lecture Notes - Lecture 9: Externality, Collective Action, Counterargument
Document Summary
Lesson 9: the political economy of trade policy. The case for free trade: the efficiency case (in favour): a tariff imposed by a small country will => efficiency losses. Instead of improving national welfare, these policies are likely to benefit only the socially influential people: free trade can be considered a better option when such biased policy is likely to dominate the socially desirable policy. For each unit of the good produced, the producers receive an amount = to the subsidy/unit (instead of export subsidy). This ^ the level of production in the domestic economy. However, unlike the tariff, the production subsidy does not ^ the p to the domestic consumers & does not generate consumption distortion loss. W free trade, the country produces 100 units of the good domestically & imports another 200. An import tariff of 5/unit ^ domestic production to 125 units and decreases imports to 125.
