Answered: Suppose now that there is a negative…

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter5: Difficult Cases For The Market And The Role Of Government

Section: Chapter Questions

Problem 10CQ

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Q. 3 Suppose now that there is a negative production externality in country B. This externality arises from less strict environmental regulations in country B. [Country A does not have a production externality because it uses a “clean” production technology.] Demand is P=100- 9Q and supply is P=Q, world price = $25 Draw a new diagram where there is a negative production externality with a constant value of 15 for every unit produced. Suppose that the government does not intervene in the market. Compute country B’s welfare under autarky and free trade with the negative production externality. Briefly explain if country A’s welfare is affected by the production externality in B. Do you agree with the claim that welfare under free trade (compared to autarky) improves in both countries when a negative production externality is present? Briefly explain why (not). Suppose the negative production externality was 5 instead of 15. Does your qualitative (not quantitative) answer about whether free trade improves welfare in both countries or not (i.e., the last two questions in Question letter B) depend on the size of the externality? Explain why your answer is economically and politically significant. Suppose that instead of a negative production externality in country B there is a negative consumption externality (i.e., waste) in country A. What happens to welfare when country A moves from autarky to free trade ? Does your answer depend on the size of the externality ? Which agents (i.e., consumers, producers) in country A would advocate for free trade (over autarky) and why ?

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