MGEC62H3 Chapter Notes - Chapter 9: Market Failure, World Trade Organization, Free Trade
18 Oct 2011
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Document Summary
Chapter 9 the political economy of trade policy notes. Summary: although few countries practice free trade, most economists continue to hold up free trade as a desirable policy. First is a formal case for the efficiency gains from free trade that is simply the cost-benefit analysis of trade policy read in reverse. Second, many economists believe that free trade produces additional gains that go beyond this formal analysis. One argument that is clearly valid in principle is that countries can improve their terms of trade through optimal tariffs and export taxes. This argument is not too important in practice, however. Small countries cannot have much influence on their import or export prices, so they cannot use tariffs or other policies to raise their terms of trade. If some domestic market, such as the labour market, fails to function properly, deviating from free trade can sometimes help reduce the consequences of this malfunctioning.
