18%20Agruments%20For%20and%20Against%20Protection,%20Part%201

18%20Agruments%20For%20and%20Against%20Protection,%20Part%201

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1 1 Arguments For & Against Protection •Th e C a s e fo r Free Trade • The Case against Free Trade – Market Failures and the Theory of the First Best – Market Failures and the Theory of the Second Best – Protectionist Argument #1 – Protectionist Argument #2 2 The Case for Free Trade Four basic arguments for free trade: 1. Free trade increases economic efficiency 2. Free trade allows for larger economies of scale 3. Free trade may increases productivity 4. Free trade provides political “neutrality” 3 The Case for Free Trade 1. Free trade increases economic efficiency: Trade barriers generally result in net losses of national economic welfare by distorting production and consumption decisions. Eliminating trade barriers gets rid of these distortions and increases national economic welfare. 4 The Case for Free Trade Q Q Q P P P The U.S. China World D S D S MD XS P T P W Q 0 D 0 D 0 * Q 0 * M 0 X 0 * Q W M
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2 5 The Case for Free Trade Q P D S P T P W P 1 * S 1 S 0 D 0 D 1 6 The Case for Free Trade Q P D S P T P W P 1 * D 1 D 0 S 0 S 1 7 The Case for Free Trade 2. Free trade allows larger economies of scale : When economies of scale exist, protected markets fragment production internationally, reduce competition domestically, and raise profits of domestic firms that are operating at an inefficient scale of production. Free trade allows firms to take advantage of larger markets and to operate at a more efficient scale of production. 8 The Case for Free Trade n P, AC PP CC AC n
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3 9 The Case for Free Trade 3. Free trade may increase productivity: Free trade provides entrepreneurs with an incentive to seek new ways to export or compete with imports, leading to more opportunities for learning and innovation and increased productivity . 10 The Case for Free Trade Q C Q W D C S C D W S W CIC 0 -(P C /P W ) 0 “A” “B” 11 The Case for Free Trade 4. Free trade provides political “neutrality”: Trade policies are often dominated by special- interests rather than consideration of national welfare. A political commitment to free trade may be a good idea even though there may be better policies in principle. 12
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This note was uploaded on 02/09/2011 for the course ECON 181 taught by Professor Kasa during the Fall '07 term at University of California, Berkeley.

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18%20Agruments%20For%20and%20Against%20Protection,%20Part%201

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