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Chapter 9 Trade Policies with Market Imperfections and Distortions
Most models showing the advantages of international trade and the costs associated with protection assume that the world is perfectly competitive. The problem is that for a variety of reasons markets are usually not perfectly competitive, at least not completely so. Economists use the term “market imperfections” to describe situations that deviate from perfect competition. And when such deviations occur, interesting things happen.
For example, it is valid to say that in a world with market imperfections, free trade may not be the best policy to maximize national welfare; instead, some type of trade protection may be better. This chapter illustrates a series of examples with models that incorporate market imperfections to demonstrate this result. However, application of another theory in economics, the theory of the second best, and some other issues are shown to mitigate this result. In other words, even though trade policies can be used to raise a nation’s welfare, there may be a better way to achieve a superior result.