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Unformatted text preview: Chapter 20 Trading Across Time and Space So far, we have 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 (partial) equilibrium. 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. 1 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 the 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 don’t 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 today’s 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 play an important efficiency role in markets, and that policies that disturb this interconnection of markets and the prices that govern them also 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. Recall that in Chapter 18, we began by looking at direct attempts by governments to control prices through price ceilings and price floors; in Chapter 19, we continued by looking at indirect price distortions arising from government taxes and subsidies within a single market; finally, we now conclude by investigating policies that interfere with prices that govern trade across interacting markets. Note that this will require us to take a somewhat more general equilibrium view — because we will look specifically at interactions between rather than just within markets (when these markets are separated by space or time). 2 1 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. 2 In Chapter 19, we had hinted at what was coming when we briefly discussed the shifting of tax burdens from taxed sectors (like housing) to untaxed markets (like non-housing capital) through capital mobility. We will see the same phenomenon here: a shifting of taxes across markets when a tax is imposed in only one of multiple markets that are connected by some form of mobility of goods or inputs. 596...
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This note was uploaded on 04/07/2008 for the course ECON 55 taught by Professor Rothstein during the Fall '07 term at Duke.
- Fall '07