Problem Set 4

1.	OPTIMAL POLICY RECOMMENDATIONS: The U.S. is a small-country importer of firearms. Suppose that you are a member of the U.S. International Trade Commission and that you must recommend a policy for the firearms industry. Consider separately each alternative goal below, recommend a "first-best" policy (from the perspective of national welfare) and briefly explain your recommendation (diagrams are optional):
	a.	For national security purposes, it is deemed desirable to increase domestic firearms production by, say, 20 percent (the amount in each case is just suggestive--don't worry about it).
	b.	For national security purposes, it is deemed desirable to reduce dependency on imported firearms by 20 percent.
	c.	For public safety purposes, it is deemed desirable to decrease domestic firearms consumption by 20 percent.

2.	TRADE AND THE ENVIRONMENT:  These questions concern the online course readings:
		Taylor (1999). Is free international trade harmful to the environment (1999) <http://faculty.oxy.edu/whitney/xaccess/ec311/iic_env_uw.htm>    Smith (2000). Little by little, breathing easier in Mexico City <http://faculty.oxy.edu/whitney/xaccess/ec311/iic_envt_lat_2000.htm>
	a.	Would you expect Taylor to be surprised by the change in environmental quality in Mexico City in recent years? Why or why not?
	b.	How would Taylor likely link (1) Nafta, (2) economic growth in Mexico, and (3) environmental quality in Mexico?

3.	DOMESTIC POLLUTION: Consider a country which does nothing to regulate the pollution costs associated with applying paints and lacquers used in the furniture manufacturing industry.
	a.	Depict a pretrade equilibrium in the country's furniture market in a supply and demand diagram. Be sure to include the country's social marginal cost curve (SMC) as well as its private supply (private marginal cost (PMC)) curve.
	b.	Now suppose that a comparatively low global price induces the country to become a small-country importer of  furniture under free trade. Depict the consequences of free trade in your diagram.
	c.	Decide whether trade makes each of the following rise, fall, remain the same, or change in an uncertain direction, and use your diagram to support your decision in each case:
		(1)	the country's national welfare; and
		(2)	the country's environmental quality.
	d.	How, if at all, do the conclusions here differ from the case of an exporter (as covered in class)?

4.	ENHANCED GAINS FROM TRADE: INCREASING COMPETITIVE CONDUCT. Suppose that steel output in South Korea is produced by a domestic monopoly.
	a.	Suppose South Korea engages in no trade in steel. Use a domestic-market supply and demand diagram to depict an initial equilibrium in which South Korea's steel monopolist charges a price above the competitive equilibrium. Label the monopoly price Pm, and label the efficient competitive price Pc.
	b.	Now suppose that the world price of steel is between Pm and Pc. Depict South Korea's free-trade equilibrium. Indicate South Korea's ordinary gain from trade and its additional gain from trade due to the competition introduced into its steel industry.

5.	EXERCISING MARKET POWER IN TRADE. Consider two large-country trading partners, OPEC, which exports oil, and the rest of the world, ROW, which imports oil.
	a.	Use a trade-market supply and demand diagram (with Dm by ROW and Sx by OPEC) to depict a free-trade equilibrium in the world oil market.
	b.	Now suppose that OPEC restricts its oil exports to ROW by imposing an export quota. Use your diagram to depict the consequences of OPEC's export quota. (hint: the export quota makes Sx by OPEC vertical at the quota amount.)
	c.	Indicate in your diagram the changes in welfare for: (1) ROW, (2) OPEC, and (3) the world as a whole, which result from OPEC's export quota.

6.	EXPORT SUBSIDIES: THE LARGE-COUNTRY CASE: Use a trade-market supply and demand analysis to illustrate the consequences of an export subsidy implemented by a large-country exporter. Be sure to indicate the resulting prices buyers pay in the exporting country and in the importing country.

7.	WTO TRADE DISPUTES BETWEEN LARGE COUNTRIES: For years, the European Union (EU) has favored banana imports from its former colonies by using trade policy to block imports of bananas grown in Ecuador and Central America and distributed by U.S. fruit companies such as Chiquita Brands and Dole. The EU has defended its policy as a form of foreign aid to its former colonies.
	a.	Use a trade market diagram to illustrate an equilibrium in which the EU is a large-country importer of bananas, but imports only from its former colonies.
	b.	In a number of trade dispute settlement hearings in the 1990s, the WTO sided with the U.S. and and its banana exporting allies in ruling that the EU's discriminatory barriers violate international trade agreements. In your diagram from part a, illustrate the consequences of free trade in bananas, with imports from Ecuador and Central America no longer restricted by the EU and therefore becoming an extra source of import supply
	c.	Indicate in your diagram:
		(1)	The total change in the EU's gains from trade.
		(2)	The total change in the former colonies' gains from trade.
		(3)	The net change in the EU's gains from trade if the EU increases foreign aid to its former colonies by the amount you indicated in part (2) in order to offset their losses from the trade liberalization..
	d.	In implementing the WTO ruling, could all the parties involved in the dispute end up at least as well off as they were before the ruling? Explain briefly.

8.	THE POLITICAL ECONOMY OF PROTECTIONISM: Based on the political economy of trade protection, account for each of the following in a sentence or two:
	a.	Why surveys indicate that the majority of the U.S. public favors increased protectionism even though the costs to U.S. consumers of the country's protectionist policies exceed $30 billion per year.
	b.	Why politicians tend to prefer trade protection to production subsidies even when production subsidies cause a smaller national welfare loss than trade protection. (Use a diagram to support your answer to this question.)
	c.	Why the costs of protection may be closer to the entire consumer costs of the protection rather than just the conventional efficiency losses.

9.	THE WORLD TRADE ORGANIZATION: Fill out the following WTO worksheets (click on the orange bullets to find the answers).
	(1)	The WTO FAQsheet (1)
	(2)	The WTO FAQsheet (2)
	(3)	The WTO FAQsheet (3)