Econ 310: The Cost of Taxation and International Trade

What are some other benefits of international trade?

1) increased variety of goods; goods produced in different countries are not exactly the same, 2) lower costs through economies of scale; some goods can be produced at low cost only if they are produced in large quantities - a phenomenon called economies of scale - a firm in a small country cannot take full advantage of economies of scale if it can sell only in a small domestic market, 3) increased competition; a company shielded from foreign competitors is more likely to have market power, a form of market failure, 4) enhanced flow of ideas; the transfer of technological advances around the world is often thought to be linked to the trading of the goods that embody those advances.

What is the protection-as-a-bargaining-chip argument?

A country may propose a trade restriction to deter other countries from placing trade restrictions on them; sometimes this is really messy, its like a poker game, which one is bluffing?

Should a tariff or import quota be part of any new trade policy?

A tariff, like most taxes, has a deadweight loss; the revenue raised would be smaller than the losses to the buyers and sellers; in this case, deadweight losses occur because the tariff would move the economy closer to no-trade equilibriums; however, tariffs would raise the economic wellbeing of producers; therefore, from the standpoint of economic efficiency, it would be best to allow trade without tariffs or import quotas.

What is the infant-industry argument against free trade?

Many new industries argue for temporary trade restrictions to help them get started; after a period of protection, these industries will mature and be able to compete with foreign firms; event horizon matters, as in the long run companies will likely be willing to incur short term losses in the pursuit of long term growth.

What is the national security argument against free trade?

Opponents of free trade often argue that industry is vital for national security; for example, if a country is buying steel from abroad and war breaks out, they won't have any steel of their own to produce weapons; be weary of accepting this argument from the industries themselves.

What is the jobs argument against free trade?

Opponents of free trade often argue that trade with other countries destroys domestic jobs; the event horizon may matter more here, as in the short run many may lose jobs to foreign markets, however, the domestic market can then adapt its output to fit its comparative advantage, while also allowing its people to experience a higher standard of living.

Why do taxes have deadweight loss?

Taxes have a deadweight loss because they cause buyers to consume less and sellers to produce less, and this change in behaviour shrinks the size of the market below the level that maximizes total surplus; because the elasticities of supply and demand measure how much market participants respond to market changes, larger elasticities imply larger deadweight losses.

Who gains and who loses from free trade, and would the gains exceed the losses?

The answer depends on whether the price rises or falls when trade is allowed; if the price rises, producers of textiles gain, and producers lose; in either case, the gains are larger than the losses, thus free trade raises the total welfare of citizens; however, the losses for those who lose are quite often very significant.

How do taxes affect economic welfare?

a tax on a good reduces the welfare of buyers and sellers of the good, and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government; the fall in the total surplus - the sum of consumer surplus, producer surplus, and tax revenue - called the the deadweight loss of the tax.

What is a Tariff?

a tax on goods produced abroad and sold domestically.

How do changes in the tax rate affect market outcomes?

as a tax grows larger, it distorts incentives more, and its deadweight loss grows larger; tax revenue first rises with the size of the tax, however, a larger tax will eventually reduce tax revenue because it reduces the size of the market.

What is the unfair competition argument against free trade?

free trade is desirable only if all countries play by the same rules; the textbook basically says "if one country subsidizes its textile market, and the other doesn't, it creates an unfair advantage for foreign producers, however, domestic consumers receive more surplus, and even without subsidies, the domestic suppliers are getting screwed anyways, so if the other country wants to drown in taxes subsidizing its industry, is it really THAT bad?" suspect claim to say the least...

If the government allows its people to import and export a good, what happens to the price of that good and the quantity of that good sold in the domestic market?

once trade is allowed, the domestic price of the good will rise or fall to match the world price; if it rises, than the country becomes an exporter, as they can produce goods at a cheaper rate than the going world rate and will thus received higher revenue, if the price falls, the country will become an importer, as the world price is cheaper than producing the good domestically; as such if the price rises, the country's quantity supplied rises, if it falls, the country's quantity supplied falls.

Define Deadweight Loss.

the fall in total surplus that results from a market distortion, such as a tax.

Define World Price.

the price of a good that prevails in the world market for that good.