DISCUSS WHETHER AN INCREASE IN TARIFFS ON IMPORTS WOULD REDUCE UNEMPLOYMENT [8]
Answers
Explanation:
The theory of the second best was formalized by Richard Lipsey and Kelvin Lancaster in 1956. The primary focus of the theory is what happens when the optimum conditions are not satisfied in an economic model. Lipsey and Lancaster’s results have important implications for the understanding of not only trade policies but also many other government policies.
In this section, we will provide an overview of the main results and indicate some of the implications for trade policy analysis. We will then consider various applications of the theory to international trade policy issues.
First of all, one must note that economic models consist of exercises in which a set of assumptions is used to deduce a series of logical conclusions. The solution of a model is referred to as an equilibrium. An equilibrium is typically described by explaining the conditions or relationships that must be satisfied in order for the equilibrium to be realized. These are called the equilibrium conditions. In economic models, these conditions arise from the maximizing behavior of producers and consumers. Thus the solution is also called an optimum.
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