International Economics Study Set 9

Business

Quiz 12 :

Trade and the Environment

Quiz 12 :

Trade and the Environment

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"One of the benefits of free trade is that it corrects the distortion caused by pollution." Do you agree or disagree Why
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Disagree. The distortion caused by pollution is the result of the difference between the private costs and the social costs of the activity that creates the pollution. Because the person choosing to take an action that creates pollution does not care about the external costs of the pollution, he tends to create too much pollution. Free trade does not alter the fact the there will remain a gap between private cost and the social cost (inclusive of the cost of pollution).

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Mining of metallic ores often causes harm to the environment in the area around the mines. Some countries impose strict policies to limit the environmental damage caused by this mining, but others do not. The mining companies in the strict countries complain that this is unfair, and ask for limits on imports of ores and metals from the lax countries. As a government official interested in advancing the national interest in a strict country, how would you evaluate the request of your mining companies
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The first thing to consider is whether the mine-related pollution in the lax countries has any adverse environmental effect on the strict country. If it does not, then the strict country has no national concern about lax policies in other countries. The strict country should get its own environmental policies right. If it can import ores cheaply from lax countries, then this increases its national gains from trade. If the mine-related pollution does have an adverse effect on the strict country, then the official should be concerned, not because the lax policies are unfair, but rather because of the external cost imposed on the country. The government in the strict country should negotiate with the lax country government for appropriate regulations. If these fail, the strict country government might benefit from imposing limits on imports of ores from the lax countries, because this would lower the production and pollution created in the lax countries.

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Consider the example of domestic pollution shown in Figure 13.4. Suppose that the marginal external cost of the pollution is $0.05 per ream produced (instead of $0.30). a. With this different MEC, does free trade make the country better off or worse off b. To gain the most from trade, should the country export or import paper How much img FIGURE 13.4 When Domestic Production Causes Domestic Pollution
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a.The shaded loss area b is now $15 million. Free trade makes the country better off, because the usual gain from trade (area a, equal to $25 million) is larger than the loss from increased pollution ($15 million).
b.If there is no way to reduce pollution per ream of paper produced, then the first-best outcome can be achieved if the government imposes a tax of $0.05 per ream produced domestically. This shifts the domestic supply curve up to (S d + $0.05). The country should still export paper, but the amount that it should export is less. With the tax, the country will produce 2.15 billion reams domestically at the international price $1.10, so it will export 350 million reams.

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Assume that the production of cement also produces a substantial amount of air pollution and that a technology is available that can lower the pollution but with somewhat higher production costs for the cement. Because of the availability of raw materials in Lindertania, it produces large amounts of cement, and its exports supply most demand in Pugelovia. But the air pollution from Lindertania's production blows into Pugelovia, causing a noticeable deterioration in Pugelovia's air quality. Although Lindertania suffers some harm itself from this air pollution, it does not now have any policy to reduce the pollution. The Pugelovian government wants to address this air pollution problem. a. If the two countries' governments cooperate, what is the best solution to address the problem Explain. b. If Pugelovia must come up with a solution on its own, what should the Pugelovian government do Explain.
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Why did the Montreal Protocol succeed in limiting global emissions of chlorofluorocarbons (CFCs), whereas the world has found it difficult to limit the emissions of CO 2 What differences between the two cases explain the difference in outcome
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