9 lecture_antidumping

This market failure creates a potengal role for

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Unformatted text preview: term protecGon from imports is therefore needed. •  JusGficaGon for trade policy (Two cases): 1.  A tariff today increases Home producGon and lowers future costs. 2.  A tariff today increases output and reduces future costs for other firms in the industry or other industries. •  Key for infant industry protecGon case: The firm’s learning shies down the en7re average cost curve to the point where it is compeGGve at the world prices, even without a tariff. Infant Industry ProtecGon Case 1: trade protecGon helps lower own costs in the future •  QuesGon: If the firm’s costs are going to fall in the future, why doesn’t it just borrow today against future profits? –  The firm needs to earn non ­negaGve profits each period to avoid bankruptcy. –  There must be some reason the firm cannot cover losses by borrowing against future profits. In this case, the trade protecGon is just offsenng an imperfecGon in the capital market. Infant Industry ProtecGon Case 2: trade protecGon leads to an increase in output and to reducGons in future costs of other firms in the sector •  When firms learn and benefit from each other’s successes => this is a type of posi7ve externality •  An example: a technological invenGon that can be imitated by other firms •  We call this knowledge spillover — firms mimic the successful innovaGons of other firms. •  When there are such spillovers, the tariff is promoGng a posiGve externality (otherwise no incenGve for innovaGon) Infant Industry ProtecGon •  In both of these cases, there exists some form of market failure. •  This market failure creates a potenGal role for government policy. –  Remaining quesGons: Does the government have the ability to idenGfy market failures? Can it disGnguish the indus...
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This document was uploaded on 01/18/2014.

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