Deck 20: Prices and Distortions Across Markets

Question 1

Explain how an import quota might be more inefficient than an import tariff that has the same impact on prices.

Answer 1

An import quota results in a difference in the price at which exporters buy and the price at which they sell.With a tariff,that difference is paid as a tax to the government -- so someone benefits.In the case of import quotas,exporters will get that same benefit as profit unless they have to compete (in terms of something like lobbying)to get the right to be the ones to export and import.If such political competition for the right to export and import exists,the effort expended in the process may be socially wasteful in the sense that it is a cost for the firms who export and import but it is not received as a benefit by anyone else.

Question 2

Suppose the price of good x in country A is lower than the price of good x in country B when no trade is permitted.In the absence of transportation costs,if the supply curve for good x in the two countries is sufficiently elastic,free trade in good x implies that country B will stop producing x.

Answer 2

True
With sufficiently elastic supply curves,the free trade equilibrium price will lie below the intersection of supply with the vertical axis in country B -- implying no production in country B.

Question 3

If country A is importing good x from country B where x is produced along a perfectly inelastic supply curve,then country B will suffer the entire deadweight loss from any tariff imposed on imports to country A.

Answer 3

False
In order for this to be true,country A would have to be passing the entire burden of the tariff to B.But as long as demand in B is downward sloping,price will fall in both A and B --- implying the burden of the tax (and its accompanying deadweight loss)is borne in both countries.

Question 4

Quality of life indexes produced in popular magazines often place a heavy emphasis on the cost of housing in different cities -- with a lower housing cost entering the index as a positive feature of the city.Why might such quality of life indeces be misleading?

Question 5

Explain the impact of speculators on markets is similar and how it may be different from the impact of exporters and importers.

Question 6

The smaller a country is,the less of an ability it has to export a portion of the burden of an import tariff to other countries.

Question 7

Regardless of what types of workers are available in different countries,unrestricted labor outsourcing always results in an equalization of wages across countries.

Question 8

If worker productivity is the same in each country,outsourcing and labor migration will both result in an equalization of wages across the two countries.

Question 9

For any import quota a country imposes,there exists a tariff the country could have imposed that will have the same impact on producers and consumers.

Question 10

The larger a country is relative to the rest of the world,the less likely it is to be able to produce a net benefit for its citizens by imposing an import tariff.

Question 11

If country A is importing good x from country B where x is produced in a perfectly competitive industry (composed of identical firms),then,in the long run,country A will suffer the entire deadweight loss from any tariff it might impose on imports of x from country B.

Question 12

When speculators buy gasoline during the low demand spring in order to sell it during the high demand summer,they cause an increase in dead weight loss in the spring that is more than made up for by an increase in social surplus in the summer.

Question 13

While some countries might be better off (in terms of social surplus)from the imposition of a tariff,the world overall is always worse off (in terms of social surplus)when import tariffs are imposed.

Question 14

When tariffs on exports are eliminated,there is at least in principle a way for everyone to benefit.

Question 15

In a world of certainty about future demand and supply,speculators cause price fluctuations across time to decrease.

Question 16

Suppose there is a tradeable goods market (such as products like textiles that can be shipped across markets)and a non-tradable goods market (such as services like hair cuts).Can outsourcing impact wages in the non-tradable market?

Question 17

When tariffs on imports are eliminated,everyone benefits.

Question 18

A speculator who takes a long position in a market buys low and sells high,whereas a speculator who taxes a short position in a market buys high and sells low.