Chapter 7: The Globalization of Market Failure?
INTRODUCTION The economic case for trade liberalization rests on its capacity to extend the reach of the market’s fabled invisible hand. As trade barriers are lowered and the world market grows more integrated, producers reallocate land, labor, and capital to those economic activities in which they enjoy a comparative advantage, and away from the production of goods and services which now can be more cheaply obtained from others. The result is a larger economic pie, which in principle – if seldom in practice – can beneﬁt all concerned. With the globalization of the market, however, comes a globalization of market failures, due to the fact that prices do not capture ‘external’ costs and beneﬁts to third parties. Say that country A produces corn more cheaply than country B, but in so doing generates more pollution. In the absence of countervailing policies, trade liberalization will cause production to shift from country B to country A, with a corresponding increase in pollution and its external costs. Similarly, if producers in country B generate higher positive externalities than those in country A – for example, via the conservation of crop genetic diversity – trade liberalization will erode the supply of these beneﬁts. In both cases, the happy ending of a bigger pie, once the external costs and beneﬁts are counted, no longer can be taken for granted. Whether the social gains from trade liberalization will exceed the social losses from the attendant market failures is an empirical question, one which cannot be answered...
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