W5 Intro to Micro

International Trade Reasons

1. Countries have different resource endowments 2. Resource endowments reflect availability of factors of production (Labour (L), Land (T), Capital (K)) 3. Countries relatively more abundant in K can produce K intensive goods at lower costs than countries with abundancy in different factor (Comp Adv)

Comparative Adv

Ability to produce G / S at lower opportunity cost than another producer

Comp Adv in International T

Countries produce more goods of Comp Adv, export it & import G with Comp Dis

Absolute Adv

Ability to produce a G / S using fewer inputs than another producer

If Pw (World Price) > P*

• Sellers makes more money to sell internationally • Thus domestic price rises to Pw • At this price, sellers indifferent from selling locally vs internationally • At Pw, Qd(Pw) < Qs(Pw) (Excess supply) • Comp Adv Producing G • Welfare improves from international trade (sellers winners, buyers losers)

If Pw (World Price) < P*

• Buyers better off purchasing from international sellers offering lower price • Domestic price must fall to Pw • At this price, buyers indifferent between buying domestic / foreign G • Excess demand (Qs (Pw) < Qd (Pw) • Comp dis in producing G • Welfare improves as result of international trade (buyers winners, sellers losers)

Gov Intervention in International Trade

1. Import Tariffs (Amount paid to gov per unit G imported) 2. Export Subsidy (Amount paid by Gov per unit G exported) 3. Export Tax (Amount paid to Gov per unit G exported) 4. Import / Export Quotas (Restriction on quantity of imports / exports allowed) 5. Anti-dumping regulations (Preventions foreign sellers to dump G domestically if price far too low) 6. "Buy Aus" Campaigns

Import Tariff

(When Pw < P*) • Imports subject to price increase (Pw -> Pw + t) • "Protects" domestic sellers by penalising foreign sellers •Quantity supplied by domestic sellers increase, while Qd by domestic buyers decrease • Imports also decrease

Import Tariff Impacts on Welfare

○ Domestic sellers winners, buyers losers ○ Gov benefit from tax revenue ○ Total surplus (welfare) decrease

Market Failure

Markets delivering inefficient outcomes (Lower well-being for society than efficient level)

Market Failure Sources

Externalities, public goods, asymmetric info, imperfect comp

Negative Externalities

Arises when a decision-maker's action causes costs for others that are not borne by the decision-maker

Positive Externalities

Arises when decision-maker's action causes benefits for others that are not received by decision-maker

1. Negative externality in production

(SMC >PMC) a. Eg pollution, meat production

2. Positive externality in production

(SMC < PMC) a. Eg beekeper & orchist

3. Negative externality in consumption

(SMB

4. Positive externality in consumption

(SMB>PMB) a. Eg vaccines, education

Gov Role in Corrected Market Failure

Internalise effects eg take account social costs / benefits of actions • Pigouvian tax / subsidy, Direct regulation