Unformatted text preview: True/False 1. False. Reason : A country can have a greater capacity to produce, but it may not have a comparative advantage. For example, US can produce more food than China or Mexico, but rather import food from them because it is not efficient to produce food and forego IT, services, etc. “If one country can produce a specific good at a lower opportunity cost than all other countries, then it has the comparative advantage in that item.” 2. True. Reason : If the country has deficient resources for an industry, the cost of producing good will be more expansive than other countries (meaning less competitive than other countries who are abundant in that deficient resource). Thus, by restricting imports, the industry can recover costs and be more competitive within the country. Recently, tire scrap trade between US and Mexico alerted environmentalists. The problem occurs due to ignorance toward externality cost of both US and Mexico. US government is not taking into account the externality cost, which is caused by circulating pollution. Since Mexico does not consider any externality cost, MC of disposing scrap tires is little to none. Because of much less MPC and more MPB for both countries, tire sellers in US would sell tires to Mexico and Mexican buyers would burn the scraps. Both countries gain, but lose more from the trade. In US, tire industries have financial advantages selling tires to Mexico. Due to lower processing fee and greater demand in Mexico, US sellers can enjoy lower MC of processing scraps and higher MB of selling tires. On the other hand, Mexico can also enjoy financial advantages. Since the demand is great and there’s almost no disposal fee, Mexican buyers can enjoy cheaper tires. It might seem both countries are in win‐win situation, however both countries lose in environmental sense. Mexico has direct contamination from burning and discarding scraps and because pollution moves one place to another US has big spillover and clean up cost. These environmental issues are due to a combination US’s myopic view toward pollution and Mexico’s poor environmental protection system. US citizens environmentally conscious, but have very limited view. They know the importance of the environment, yet do not follow recycling and oppose to expanding recycling facilities. In Mexico, people are willing to take health risks due to lack of financial wealth and poor living standards. They are trading‐off between today’s small wealth and future’s environment and everyone’s health. US’s ‘we don’t care as long as NIMBY’ syndrome and Mexico’s ‘we’ll do whatever for money’ attitudes came to conclusion of environmental disaster. There are few solutions to dissolve these issues. First, US could pay Mexico to develop proper recycling system using their cheap resources. Because most recycling process is labor and land intensive and Mexico is abundant in labor and land, it makes economic sense to build processing facilities in Mexico. Also, Mexico’s opportunity costs and, as well as, absolute costs of land and labor are much cheaper than US. It might be optimal to delegate future recycling to Mexico, too. While Mexico is utilizing their resources, US can accommodate Mexico by subsidizing environmentally sound and safe technology. Thus, US and Mexico trades green technology and capital for clean environment. At the same time, the policy should be followed by strong enforcement. Mexico should strengthen penalty and enforcement for littering and burning tire scraps. To increase revenue, which will be used for subsidizing green technology to Mexico, US should charge disposing taxes on all scraps that are produced within the border of US. Subsidizing money directly not efficient since Mexico is unlikely to invest the capital in green technology. In this way, both countries can meet their socially and realistically optimum point in least costly way. ...
View Full Document
- Spring '07
- lower opportunity cost, externality cost, environmental sense. Mexico, strong enforcement. Mexico, tire scrap trade