ECO2030 1st Edition Lecture 23Outline of Last Lecture I. International TradeOutline of Current Lecture II. Arguments against international tradeIII. Negative ExternalitiesIV. Positive ExternalitiesCurrent LectureReview - Arguments against international trade ● job argument is not a good argument for not trading● National security argument is better● Infant-industry argument - debated, many economists say that if you make a good product you will sell, ○ also, giving short term protection often stays longer than it should (once in place it is hard to remove) - protection hurts economy● Unfair competition argument○ Says “free trade is desirable only if all countries play by the same rules”○ Can threat to bad trade if a country does not play by the rules○ Problem - the threat may not workExternalities ● A Market Failure● The uncompensated impact of the persons actions on a bystander/3rd party● Negative externality - when the impact is adverse (negative)○ the cost to society of producing a good○ Pollution (Best example)● Positive externality ○ When impact on the bystander is beneficial (Vaccines, when neighbor invests in landscape, education - benefits society)● Market equilibrium ○ Inefficient allocation of resources - when buyers and sellers neglect the external costs of consumption and supply○ This neglect fails to maximize the total benefit to society○ When there is a negative externality, there is a market failure and therefore a rolefor governmentThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.POptimumEquilibriumSupply (Private Cost)Demand (Private Value)QExternal CostQ Optimum Q MarketSocial Cost (Private + External Cost)POptimumEquilibriumSupply (Private Cost)Demand (Private Value)QExternal BenefitQ Market Q OptimumSocial Value (Private Value + External Benefit)■ government can protect the interests of the bystanders due to the negative externality ● Welfare economics - recall that the efficient equilibrium price was the intersection of thedemand and supply curves because this maximizes the producer and consumer surplus○ however, with a negative externality, this equilibrium is not efficient● Social Cost = total costs (Private + external costs)○ The social Cost curve is always above the supply curve (in the case of a negativeexternality)○ Can think of it as a leftward shift in the supply curve (higher input costs)● The Optimum quantity, maximizes totalwelfare (by eliminating the externalcost)● This is called Internalizing theexternality● It is how Government can addressmarket failures due to externalities bychanging incentives (policies, taxes etc)so that people/firms account for theexternalityPositive externalities - external benefit● represented by the social value curve● Social Value curve = Private value +External Benefit) ● Social Value curve is above thedemand curve● For positive externalities - the optimumquantity is greater than the marketequilibrium● Government can correct the marketfailure by internalizing the externality○ e.g. Subsidize
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