POLI 441 Lecture Notes - Lecture 2: Capital Market, Market Failure, Pax Britannica
26 May 2016
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Week 2 lecture - why do countries trade & trade policy. Terms of trade: the price of imports in terms of exports; the purchasing power of a country"s exports in terms of imports it can produce. Most important exception to free trade ever created. An optimal tariff begins to look like a prisoner"s dilemma. Trade agreements are meant to diffuse the prisoner"s dilemma, but retaliation and tit-for-tat strategies actually appear quite often. Imposing duties can be defensible when they are imposed temporarily, in hopes of naturalizing a foreign industry. Rationale is the same as cases of isi. All proponents agreed that such subsidies had to be temporary. Meade showed that all eligible infant industries could turn to capital markets; in the absence of efficient capital markets, governments should remedy that inefficiency first. Possible exception: there is a true market failure that is not due to an efficient capital market whereby technological advances lead to a lot of free-riding.
