ECONOMICS 3150B Lecture 12 October 30

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ECONOMICS 3150BLecture 12October 30
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Brand Names

• Imperfect information
• Re. product quality/safety lemons model
  consumers believe all suppliers produce lowest
  quality and so bad drive out good suppliers
• Re. risks adverse selection (insurance markets)
  only bad risks buy insurance, good risks
  squeezed out (experience rating) credit crunch
  because of inability to quantify credit risks
  (credit risks improperly priced) magnitude of
  liabilities stemming from terrorist attack
  (following 9-11, insurance companies tried to
  terminate insurance for terrorist attacks)
• Re. quality, motivation of workers statistical
  discrimination (do not hire from among certain
  groups of job applicants)

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Brand Names

• Brand names a signal for quality quality
  difficult to measure without repeated use of
  product brand name developed over time provides
  some assurance to consumers about quality of
  product
• Developing a brand name
• Consumers willing to pay price premium for
  established brand name products
• Travel abroad, willing to purchase brands
  recognized from home (hotels, consumer goods,
  financial institutions, entertainment)
• Example of products from China

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Brand Names

• Value of brand name BMW, Coca Cola, Disney,
  Coach, Trump, Wynn, Dell, Google, Apple,
  Starbucks, Nokia, Microsoft, Zara, HM, Harrods,
  Prada, Sony, Toyota, GE, Nike, etc.
• Transferable to other markets? geographic,
  product

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Intra-Industry Trade

• 25 of world trade
• Most significant in sophisticated manufactured
  products (machinery, chemicals, pharmaceuticals,
  telecommunications equipment, autos, aerospace)
  and trade among industrialized countries
• Intra-industry trade often takes the form of
  production of specialized, skill or
  technology-intensive components in one country
  and assembly in another country
• Nortel develops a technology manufactured by an
  EMS company, perhaps in Canada or in some other
  country (costs and productive/ technology
  capacity) then sold as part of system or network
  by Nortel

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Intra-Industry Trade

• Competitive advantage and introduction of new
  product/variety
• Caters to domestic demand (tastes, income levels)
  
• Uses familiar technology
• PLC growth in domestic demand ? entry expansion
  of demand in other markets
• Small size initially of foreign markets ? with
  economies of scale, supply foreign markets from
  domestic plants
• Growth in foreign markets ? expansion of
  production, creation of subsidiaries as
  consolidation reduces number of competitors
• Companies with foreign subsidiaries will transfer
  production more quickly

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Canada-US FTA

• Gains from trade
• Traditional comparative advantage, new products
• Larger markets economies of scale, plant
  economies (specialization), learning curves
• Increased competition new products, higher
  quality, lower prices, efficiency
• Minimize trade disputes less likely to be
  side-swiped when trading partner initiates trade
  dispute against other countries dispute
  resolution mechanism fairer and quicker in
  resolving trade disputes
• Consider softwood lumber under NAFTA, subsidies
  for regional jets Canada, Brazil under the
  WTO
• Losses
• Income losses for owners of relatively abundant
  resources
• Adjustment to new trade patterns unemployment
  during transition

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Canada-US FTA

• Argument in favour of FTA with US based on Canada
  exploiting economies of scale and gaining secure
  access to US market (required to encourage
  investment in Canada and restructuring)
• Productivity levels in Canada 25 below US
  because Canadian branch plant replica of US
• Same number of varieties and shorter production
  runs
• Less competition thus X-inefficiency and less
  incentive to innovate
• Plant economies of scale
• Standard internal economies of scale and per unit
  costs decrease with reduction in number of
  products produced in each plant

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Canada-US FTA

• Problems with argument
• If economies of scale so important why did some
  firms not specialize and drive competitors out of
  the market?
• Tariff barriers had been declining since 1947
  what if management a problem?
• Security of access limited incentives to
  restructure

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GHG Caps

• Canadas position at Bali conference on climate
  change
• All countries must agree to carbon emission
  limits, not just developed countries
• No trade advantage because of different rules
• Longer time frame to achieve significant GHG
  reduction targets

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GHG Caps

• Options
• Carbon tax
• Magnitude
• Unilateral, multilateral
• Use of proceeds
• Regulations
• Energy efficiency standards autos
• Emission limits
• Unilateral, multilateral
• Monitoring and enforcement
• Cap and trade systems
• Specific industries or general system
• Setting limits each year whose responsibility?
• Unilateral, multilateral
• Monitoring, enforcement
• Gaming of system for competitive advantage

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GHG Caps

• US
• Companies reducing emissions to prevent class
  action law suits along the lines of those in the
  tobacco industry
• Lieberman-Warner Climate Security Act
• Cap US carbon consumption through tradable permit
  plan
• Criticisms What level of emission reductions is
  realistic? Damage competitiveness of US based
  companies without parallel commitments from
  trading partners

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GHG Caps

• US
• Lieberman-Warner Climate Security Act
• Counter-argument
• Emissions in China increasing in part because of
  export growth (estimate that in 2004, 23 of
  Chinas GHG emissions resulted from net exports
• 6 of Chinas GHG emissions result from exports
  to US
• Goal for tradable permit scheme is to force
  consumer prices for goods to reflect the harm
  that the production of those goods causes the
  planet
• Act would require importers of goods from
  countries without carbon caps obtain permits for
  the emissions resulting from the goods
  production
• Requirement could be used to protect American
  jobs from foreign competition
• Tradable permit system that treated emissions
  from domestic producers identically to emissions
  associated with imported goods, then products
  that are more emissions-intensive, whether
  domestic or imported, would require more permits
  and thus be more expensive