Lecture_Note_Set_11_Gains_From_Trade

Lecture_Note_Set_11_Gains_From_Trade - Chapter 11 Measuring...

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Chapter 11 Measuring the Gains-From-Trade Preparation. In this chapter you will encounter the following ideas: Producers’ Surplus. Consumers’ Surplus. Total Surplus. Economic efficiency. Pareto’s efficiency criterion. Deadweight loss. Ceiling price. Floor price. Excise tax. Consult the index of your textbook and review what your book has to say about these topics before coming to class. Motivation. Economists often claim that competitive markets are “efficient” insti- tutions for generating gains to buyers and sellers from trade. They also claim that this efficiency is a primary reason why most of the market-driven economies of this world survived and prospered when, at the same time, command economies such as those in the Union of Soviet Socialist Republics (USSR), the People’s Republic of China, North Korea and Cuba withered. North Korea’s and Cuba’s economies are the last of these command economies; neither country is prospering. The economies of the countries that used to comprise the USSR either have or are in the midst of 287
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288 CHAPTER 11. MEASURING THE GAINS-FROM-TRADE painful conversions to economies in which market trading plays an important role. The same is true for the People’s Republic of China’s economy. The evidence is indeed strong that market-oriented economies have done better throughout most of the past century than have competing nonmarket-oriented economies. Why is this? What does “efficiency” mean? There is also a constant debate over whether there is a useful role for government to play in regulating markets. Some argue that government regulation is little more than interference that reduces markets’ abilities to generate and distribute gains- from-trade. In other words, the assertion is that regulation reduces market efficiency. Others counter that while this may be true for some types of markets, it is not gen- erally true because there are many instances in which properly designed regulations can improve markets’ generation and distribution of gains-from-trade. This chapter examines the basic essentials of these ideas. Measuring gains-from-trade. When a buyer and a seller undertake a trade with each other of their own free wills we say that the trade is “freely undertaken” or, more briefly, that it is a “free trade.” A free trade that takes place between a buyer and a seller necessarily benefits both the buyer and the seller. Why? Because a free trade will not occur if either partner to the trade is worse off as a consequence of the trade; whoever would be worse off from trading would refuse to trade. Therefore whenever we see a free trade occur it must be because both of the trading partners gain from the trade. But by how much are the buyer and the seller better off? We want numerical measures of the gains to the buyer and the gains to the seller. You have already met these measures – they are the Consumer’s Surplus and the Producer’s Surplus. But in case you have forgotten some of the details, a little revision is provided next.
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