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a) Describe the benefits of gasoline/diesel powered engines compared to various alternatives.

b) Discuss the costs of gasoline/diesel powered engines compared to the alternative.

c) Various scholars, including Greg Mankiw, have suggested that consumers of gasoline/diesel engines do not internalize all of the costs of these engines; what solution do they suggest for this issue and discuss the economic arguments for and against such solutions.

d) What are the estimates of the elasticity of the demand for gasoline in the short-run and what are the implications for the solutions discussed in response to part c

e) Discuss the economic arguments in favor of and against the subsidies (both implicit and explicit) provided to gasoline/diesel engines as well as their alternatives. Make sure to provide a comprehensive discussion of all types of subsidies.

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Kritika Krishnakumar
Kritika KrishnakumarLv10
28 Sep 2019
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Related questions

Various scholars, including Greg Mankiw, have suggested that consumers of gasoline/diesel engines do not internalize all of the costs of these engines. What solution do they suggest for this issue, and discuss the economic arguments for and against such solutions?

Read The Economist's articles, "The return of economic nationalism," "The battle of Smoot-Hawley," and Business Week's article, "Jobs and Protectionism in the Stimulus Package."

Do you believe the provision of "Buy America" placed in the $787 billion stimulus package by Congress was necessary during the recession to ensure American jobs and strengthen the American Economy?

Or was this Congressional provision a form of protectionism similar to the Smoot-Hawley bill passed in 1930?

The world economy

The return of economic nationalism

Feb 5th 2009

From

The Economist

print edition

A spectre is rising. To bury it again, Barack Obama needs

to take the lead

Illustration by Jon Berkeley

MANAGING a crisis as complex as this one has so far called for nuance and pragmatism

rather than stridency and principle. Should governments prop up credit markets

by offering

guarantees or creating bad banks? Probably both. What package of fiscal stimulus would be

most effective? It varies from one country to the next. Should banks be nationalised? Yes,

in some circumstances. Only the foolish and the partisan have r

ejected (or embraced) any

solutions categorically.

But the re

-

emergence of a spectre from the darkest period of modern history argues for a

different, indeed strident, response. Economic nationalism

—

the urge to keep jobs and

capital at home

—

is both turnin

g the economic crisis into a political one and threatening the

world with depression. If it is not buried again forthwith, the consequences will be dire.

Devil take the hindmost

Trade encourages specialisation, which brings prosperity; global capital marke

ts, for all their

problems, allocate money more efficiently than local ones; economic co

-

operation

encourages confidence and enhances security. Yet despite its obvious benefits, the

globalised economy is under threat.

Congress is arguing about a clause in the $800 billion

-

plus stimulus package that in its most

extreme form would press for the use of American materials in public works. Earlier, Tim

Geith

ner, the new treasury secretary, accused China of “manipulating” its currency,

prompting snarls from Beijing. Around the world, carmakers have lobbied for support (see

article

), and some have got it. A host of industries, in countries from India to Ecuador, want

help from their governments.

The grip of nationalism is tightest in banking (see

article

). In France and Britain, politicians

pouring taxpayers’ money into ailing banks are demanding that the cash be lent at home.

Since banks are reducing overall lending, that means repatriating cash. Regulators are

thinking nationally too. Switzer

land now favours domestic loans by ignoring them in one

measure of the capital its banks need to hold; foreign loans count in full.

Governments protect goods and capital largely in order to protect jobs. Around the world,

workers are demanding help from t

he state with increasing panic. British strikers, quoting

Gordon Brown’s ill

-

chosen words back at him, are demanding that he provide “British jobs

for British workers” (see

article

). In France more than 1m people stayed away from work on

January 29th, marching for jobs and wages. In Greece police used tear gas to control

farmers calling for even more subsidies.

Three arguments are raised in defence of economic nationalism: t

hat it is justified

commercially; that it is justified politically; and that it won’t get very far. On the first point,

some damaged banks may feel safer retreating to their home markets, where they

understand the risks and benefit from scale; but that is

a trend which governments should

seek to counteract, not to encourage. On the second point, it is reasonable for politicians to

want to spend taxpayers’ money at home

—

so long as the costs of doing so are not

unacceptably high.

In this case, however, the c

osts could be enormous. For the third argument

—

that

protectionism will not get very far

—

is dangerously complacent. True, everybody sensible

scoffs at Reed Smoot and Willis Hawley, the lawmakers who in 1930 exacerbated the

Depression by raising American tar

iffs. But reasonable people opposed them at the time,

and failed to stop them: 1,028 economists petitioned against their bill. Certainly, global

supply

-

chains are more complex and harder to pick apart than in those days. But when

nationalism is on the marc

h, even commercial logic gets trampled underfoot.

The links that bind countries’ economies together are under strain. World trade may well

shrink this year for the first time since 1982. Net private

-

sector capital flows to the

emerging markets are likely t

o fall to $165 billion, from a peak of $929 billion in 2007. Even

if there were no policies to undermine it, globalisation is suffering its biggest reversal in the

modern era.

Politicians know that, with support for open markets low and falling, they must

be seen to

do something; and policies designed to put something right at home can inadvertently eat

away at the global system. An attempt to prop up Ireland’s banks last year sucked deposits

out of Britain’s. American plans to monitor domestic bank lending

month by month will

encourage lending at home rather than abroad. As countries try to save themselves they

endanger each other.

The big question is what America will do. At some moments in this crisis it has shown the

way

—

by agreeing to supply dollars to

countries that needed them, and by guaranteeing the

contracts of European banks when it rescued a big insurer. But the “Buy American”

provisions in the stimulus bill are alarmingly nationalistic. They would not even boost

American employment in the short r

un, because

—

just as with Smoot

-

Hawley

—

the inevitable

retaliation would destroy more jobs at exporting firms. And the political consequences would

Protectionism

The battle of Smoot

-

Hawley

Dec 18th 2008

From

The Economist

print edition

A cautionary tale about how a protectionist

measure opposed by all right

-

thinking people

was passed

Library of Congress

Hawley and Smoot, the bogeymen of trade

EVEN when desperate, Wall Street bankers are not given to grovelling. But in June

1930 Thomas Lamont, a partner at J.P. Morga

n, came close. “I almost went down

on my knees to beg Herbert Hoover to veto the asinine Hawley

-

Smoot Tariff,” he

recalled. “That Act intensified nationalism all over the world.”

According to David Kennedy, an historian, Lamont was “usually an influential

economic adviser” to the American president. Not this time. Hoover signed the bill

on June 17th: “the tragic

-

comic finale”, said that week’s

Economist

, “to one of the

most amazing chapters in world tariff history...one that Protectionist enthusiasts the

worl

d over would do well to study.”

The Tariff Act of 1930, which increased nearly 900 American import duties, was

debated, passed and signed as the world was tumbling into the Depression. Its

sponsors

—

Willis Hawley, a congressman from Oregon, and Reed Smo

ot, a senator

from Utah

—

have come to personify the economic isolationism of the era. Sixty

-

three years later, in a television debate on the North American Free

-

Trade

Agreement, Al Gore, then vice

-

president, even presented his unamused anti

-

NAFTA

opponent,

Ross Perot, with a framed photograph of the pair. Now, with the world

economy in perhaps its worst pickle since the Depression, the names of Hawley and

Smoot are cropping up again.

In fact, few economists think the Smoot

-

Hawley tariff (as it is most often

known)

was one of the principal causes of the Depression. Worse mistakes were made,

largely out of a misplaced faith in the gold standard and balanced budgets.

America’s tariffs were already high, and some other countries were already

increasing their own.

Nevertheless, the act added poison to the emptying well of global trade (see chart).

The worldwide protection of the 1930s took decades to dismantle. And bad

monetary and fiscal policies were at least based on the economic orthodoxy of the

day: economists

would tear each other apart over the heresies of John Maynard

Keynes. On protection, there was no such division. More than a thousand

economists petitioned Hoover not to sign the Smoot

-

Hawley bill. Bankers like

Lamont sided with them; so did editorialists

by the score.

The “asinine” bill began as a much smaller beast: the plan was to help American

agriculture, which had slumped in the early 1920s. Congress passed sev

eral bills to

support prices and subsidise exports, but all were vetoed by Calvin Coolidge,

Hoover’s predecessor. With no obvious logic

—

most American farmers faced little

competition from imports

—

attention shifted to securing for agriculture the same

sort

of protection as for manufacturing, where tariffs were on average twice as

high. To many of its supporters, “tariff equality” meant reducing industrial duties as

well as raising those on farm goods. “But so soon as ever the tariff schedules were

Jobs and Protectionism in the Stimulus

Package

President Obama's spending bill promotes the use of

American goods and labor. Despite foreign and domestic

protests, the language is mainly rhetorical

Members of the Senate and the House hash out differences between the two versions of the

economic stimulus legislation at the U.S. Capitol on Feb. 1

1

Chip Somodevilla/Getty Images

By

Moira Herbst

The $787 billion spending legislation being signed on Feb. 17 by President Barack Obama is

designed to jolt some life into a moribund economy. Already, though, provisions to use the

mo

ney to "buy American"

—

whether that means American iron, steel, or labor

—

is sparking a

debate about whether such rules in a global economy amount to protectionism.

Organized labor and small U.S. manufacturers won an amendment to the stimulus bill to ensure

that more materials used on construction and infrastructure are made in the U.S. Critics of the H

-

1B visa program won tougher rules governing when banks that are bailed out by the Troubled

Assets Relief Program (TARP) can fill jobs with skilled immigrants

.

The final language drew criticism from abroad, where editorials and government officials

warned it could run afoul of trade agreements. But both provisions are less stringent than earlier

versions had been, and neither is likely to have a radical effect

on how stimulus spending takes

shape.

Opposition from Exporters

The clearest attempt to wall off foreign companies from U.S. spending came in a "Buy

American" provision. That rule requires that only U.S. iron, steel, and other manufactured goods

be used

for public buildings and public works funded under the bill. However, it comes with

several key caveats.

For one, the language states that the Buy American po

licy must not violate

U.S. obligations under existing international trade agreements. Nor does the rule apply if

American goods aren't available in sufficient quantities or if they'll increase the cost of the

overall project by more than 25%. Federal highw

ay, transit, and airport projects are already

covered by similar Buy American requirements.

The battle over the provision had been contentious. On Feb. 3, 100 business groups and

companies

—

including the U.S. Chamber of Commerce, General Electric (

GE

), Caterpillar

(

CAT

), and other major construction, defense, and

high

-

tech companies

—

wrote a letter to Senate

leaders warning that a far

-

reaching Buy American rule "will harm American workers and

companies across the entire U.S. economy, undermine U.S. global engagement, and result in

mirror

-

image trade restrictions abr

oad that would put at risk huge amounts of American exports."

But advocates of the provision

—

including the Alliance for American Manufacturing, a

partnership of manufacturing companies and the United Steelworkers union

—

said

such rules are

needed

to stem the tide of layoffs in the U.S. construction and manufacturing sectors.

Coalition Claims 'Major Victory'

In negotiations, the Obama Administration sought to r

econcile the opposing sides. White House

spokesman Robert Gibbs told reporters on Feb. 12 that the final bill achieves this. "I think where

we ended up with the Buy America provision is the right compromise that respects the Buy

America laws that we've had

on our books for many, many years while also ensuring that the

language doesn't create unnecessary trade disagreements in a time of economic crisis," Gibbs

said.

Scott Paul, executive director of AAM, said in a prepared statement that the resulting langu

age

was "a major victory for American manufacturers and workers." He said: "Buy America is good

news for laid

-

off workers in construction and manufacturing, and good news for the global

economy by helping to spur U.S. growth."

That's not how it was receive

d overseas, however. Robert Zoellick, president of the World Bank,

told

The New York Times

that

it was crucial to avoid the protectionist policies of the 1930s. "The

Buy Ame

rican provision is very dangerous," he said. At the Group of Seven meeting of world

financial leaders in Rome last week, U.S. Treasury Secretary Timothy Geithner was pressed to

assure other countries that the Obama Administration would remain committed to

free trade.

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