HW #4 - Sophia Liaw UT EID: sl24462 10/30/08 3 pages HW #4...

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Sophia Liaw UT EID: sl24462 10/30/08 3 pages HW #4 Question 1 a. Please see separate sheet for graph. b. Consumers benefit from free trade. Producers lose from free trade. c. The rest of the world has comparative advantage in jeans. d. Please see separate sheet for graph. e. Free trade is more efficient. Consumers lose from a tariff, and producers gain from a tariff. Question 2 a. Please see separate sheet for graph. b. The government can get to the efficient quantity by using Pigovian taxes, Command and Control, or Tradeable Permits (Cap & Trade). Pigovian Taxes Pros: They are precise and cost-effective because there is a set tax for each unit of use of the negative externality. The firm itself establishes the importance of solving the negative externality because it chooses whether or not it is worth it to impose the negative externality. They bring revenue to the government. They reduce the negative externality at a low cost to society. They enhance economic efficiency. Cons: High taxes can run firms out of business. Equal reduction of the
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HW #4 - Sophia Liaw UT EID: sl24462 10/30/08 3 pages HW #4...

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