2 Impact of Trade First Look Background Important Concepts 1 Pareto Improvement PI 2 Economic Efficiency 3 Potential Pareto Improvement PPI 4 Measuring Benefits and Inefficiencies a Consumer Surplus b Producer Surplus c Total Benefits d Deadweight Loss Pareto Improvement PI Any action or change that makes at least one entity better off and harms no entity no externalities etc Zero losses Economic Efficiency Not wasting opportunities to make people better off All PIs and PPIs are exploited Pareto optimal Potential Pareto Improvement PPI Any action or any change where the gains of the gainer is greater than the losses to the loser if any Any PPI can in theory be converted to a PI by adding an appropriate side payment Compensation to the loser Why side payments often don t occur So PPIs don t become PIs and are blocked by losers 1 Incentive Effects Possible expansion of claimed harm Side payments incentivizes possible exploitation of the compensator 2 Unclear Property Legal Rights Who should give way make the side payment Unclear rights over the gains responsibility over the losses 3 Transaction Costs Cost of arranging the deal is too great Arrange the collection of the opportunity cost of issuing the side payment etc wipes out the benefits 4 Free Rider Problem People benefit without having to pay Partial Equilibrium Model 1 Autarky Equilibrium 2 Free Trade Equilibrium 3 Net Gains from Trade 4 Conclusion and unanswered questions