sold by the sellers with the lowest costs and with a tariff there are

Sold by the sellers with the lowest costs and with a

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sold by the sellers with the lowest costs, and with a tariff, there are unexploited gains from trade between buyers and sellersArguments against International TradeJob lossoWe pay imports with exportsoTrade restrictions save visible jobs, but they destroy jobs that are just as real but harder to seeChild laboroShare of children in workforce higher in less developed countries and historically in US and other developed countriesNational SecurityKey industrieso“industrial policy”Government picks “winners” and “losers”Guides investment, restricts imports and foreign investmentStrategic Trade ProtectionismoTaxes on exportsoGovernment helps firms form a cartel o
Chapter 10: Externalities: When Prices Send the Wrong Signals10/22/2014Private cost– a cost paid by the consumer or the producer
External cost– a cost paid by people other than the consumer or the producer rading in the marketSocial cost– the cost to everyone: the private cost plus the external costExternalities– external costs or external benefits that fall on bystandersSocial surplus– consumer surplus plus producer surplus plus everyone else’s surplusEfficient equilibrium– the price and quantity that maximizes social surplusEfficient quantity– the quantity that maximizes social surplusMarket failure– when third parties bear a significant share of the costs or benefits, then the market quantity is not efficientPigouvian tax– A tax on a good with external costsA tax on an ordinary good increases deadweight loss but a tax on a good with an external cost reduces deadweight loss and raises revenueMarket prices are signals but when there are external costs or benefits, the market price sends the wrong signalIf there are external costs, the market price is too low, thus resultingin overconsumptionA Pigouvian tax increases the price so that the after-tax price sends the correct signalPigouvian subsidy– a subsidy on a good with external benefits Similarly if there are external benefits, the market price is too high, thus resulting in underconsumptionA Pigouvian subsidy reduces the price so that the after-subsidy pricesends the correct signalExternal benefit– a benefit received by people other than the consumers or producers trding in the marketCoase theorem – posits that if transaction costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalitiesIn other words, in these cases, trading makes sure that just the rightamount of the externality is produced. If there were either too little or too much of the externality, trading would push the quantity to the optimum levelIf the conditions of the Coase theorem are met, we can replace this with the even stronger conclusion that in a free market, the quantity

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