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Unformatted text preview: Chapter 20 Prices and Distortions Across Markets So far, we have usually treated a market as if it was literally that: A place where buyers and sellers come together, compete with one another and trade goods at the prices that emerge in equilibrium. 1 But markets are of course quite a bit more complicated, with goods being traded across geographic markets, from city to city, region to region and country to country. With lower and lower transportation costs in growing sectors such as information technology, services are often performed in one country for customers across the world. 2 And goods are traded as much across time as they are across space, with some purchasing now in order to sell in the future and others selling now what they bought in the past or, as we will see what they intend to buy in the future. In each of these cases, we can think of trade as occurring both within and across markets. When goods are shipped between cities, we dont usually pay much attention to such trades but when goods cross international boundaries, we refer to those that bring the goods into a country as importers and those that ship them out of a country as exporters . When someone buys in todays market with the intention of selling when price rises in the future, on the other hand, we refer to this person as a speculator . We will demonstrate in this chapter that exporters, importers and speculators can play an important efficiency role in markets. Policies that disturb this interconnection of markets once again disturb price signals that contain information which coordinates markets and, for this reason, once again cause dead weight losses. This chapter therefore represents the third (and final) chapter investigating violations of the first welfare theorem due to government policy distorting prices. We began in Chapter 18 by looking at direct attempts by governments to control prices through price ceilings and price floors and continued in Chapter 19 by looking at indirect price distortions arising from government taxes and subsidies within a single market. We now conclude by investigating policies that interfere with 1 This chapter presumes a basic understanding of partial equilibrium as developed in Chapters 14 and 15 and uses the concept of elasticity as developed in the first part of Chapter 18. It also uses the concept of tax incidence covered in Section 19A.1 of Chapter 19. 2 When I recently called the support line for my local cell phone company, for instance, I had a hunch that the person I was speaking to was not living just down the street. I asked him and sure enough, my phone call had gone all the way to India to be answered by someone there. 728 Chapter 20. Prices and Distortions Across Markets prices that govern trade across interacting markets. This will require us to take a somewhat more general equilibrium view something we began to hint at in Chapter 19 when we briefly discussed the shifting of tax burdens from taxed sectors (like housing) to untaxed markets (like non-housing...
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- Fall '09