Chapters 10, 11 & 12

Question 1

what are the arguments regularly made for free trade?

Answer 1

• allocates resources most efficiently
• Allows firms or industry to take advantage of economies of scale
• Provides competition and opportunities for trade (dynamic benefits)
• Avoids the loss of resources through rent seeking

Question 2

How would a small tariff affect national welfare in a large country?

Answer 2

The benefits through improved terms of trade may outweigh the losses caused by distortions in production and consumption and so a small tariff will result in increased welfare.

but at some tariff rate, the national welfare will begin to decrease as the economic efficiency loss exceeds the terms of trade gain.

Question 3

What is marginal social benefit?

Answer 3

Economists calculate the marginal social benefit to represent the additional benefit to society from private production.

Question 4

what is a “second best” policy ?

Answer 4

The “first” best policy would be fixing the market failures (a domestic policy aimed directly at the source of the problem)

A “second best” policy occurs when the best policy is not feasible; then the government intervention in another market may be the “second best” way of fixing the problem.

Question 5

What is an activist trade policy?

Answer 5

AN activist trade policy usually means government policies that actively support industries through subsidies.

Question 6

what is a strategic trade policy?

Answer 6

A government policy to give a domestic firm a strategic advantage in productionq