The Gains from Trade Debete: A Further Reply

Abstract

government programs. In figure 1 we use an even simpler analysis than previously. The excess supply schedule is ES, and ED is the excess demand schedule. For the exporter, the gain from is the crosshatched area Pabc. Suppose the government introduces a price support of PS with the result that exports increase from Q1 to Q2. Producers become better off by PAdbPa. Importers become better off by Pabef, but there is a government cost of Psdef. The price support program generates a net cost of Pabdef. Our disagreement appears to be over semantics. We called the above situation one of negative from because the cost to the treasury of Psdef far exceeds the standard from area of cdPs (given a price support of Ps). The so-called gains from trade are less than the government costs. We do not mean from our statement of zero from or negative from that the area above the excess supply curve does not exist (our original article makes this very clear), but rather that the area above the excess supply curve measured at the price support level is less than or equal to the government treasury cost. We do not confuse the overall welfare of a policy with the welfare effect of free trade. In figure 1, in a distortionary free world, there is a gain from free of Pabc. Introduce into the market a price support of P, and the from become less than the cost of the price support which was used to both increase producer price and expand exports. We choose to call this situation a negative from situation (despite the positive area above ES) since it P