2. Consider a perfectly competitive market for steel in a small exporting country. Suppose that steel production causes local air and water pollution. Assume that the larger the steel output, the higher the social cost of pollution; thus, steel production creates a negative externality. a. Explain what type of trade tax or subsidy policy could be used to reduce the negative effects of pollution. Demonstrate the welfare effects using a partial equilibrium diagram. Assume that your policy reduces social costs by R dollars. Under what condition would the policy raise national welfare? b. Explain what type of purely domestic policy could be used to reduce the pollution. Use a partial equilibrium diagram to demonstrate the welfare effects of this policy. Again assume that your policy reduces social costs by R dollars. c. Explain why the purely domestic policy may be superior to the trade policy

2. Consider a perfectly competitive market for steel in a small exporting country. Suppose that steel production causes local air and water pollution. Assume that the larger the steel output, the higher the social cost of pollution; thus, steel production creates a negative externality. a. Explain what type of trade tax or subsidy policy could be used to reduce the negative effects of pollution. Demonstrate the welfare effects using a partial equilibrium diagram. Assume that your policy reduces social costs by R dollars. Under what condition would the policy raise national welfare? b. Explain what type of purely domestic policy could be used to reduce the pollution. Use a partial equilibrium diagram to demonstrate the welfare effects of this policy. Again assume that your policy reduces social costs by R dollars. c. Explain why the purely domestic policy may be superior to the trade policy

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A10