Study Questions

5.1 What is intraindustry trade, how is it measured, and how does it differ from

interindustry trade? Are the gains from trade similar?

5.2 Monopolistic competition is often caused by internal economies of scale.

Is this relatively common market structure in favor of consumers? Explain

your answer.

5.3 What are the differences between external and internal economies of scale

with respect to the size of firms, market structure, and gains from trade?

5.4 What are three key incentives for firms in a particular industry to cluster

together in a geographical region?

5.5 Why is geographical concentration said to be self-reinforcing? Explain with

an example.

5.6 When the United States signed a free-trade agreement with Canada (1989),

no one thought twice about it. When the agreement with Mexico was signed

(1994), there was significant opposition. Use the concepts of interindustry

and intraindustry trade to explain the differences in opposition to the two

trade agreements.

5.7 What are the theoretical justifications for targeting the development of specific

industries?

5.8 What are the rules that govern the analysis of cases of market failure?

Explain with examples.

5.9 Figure 5.3 illustrates the case of an industry that generates external social

benefits with its production. Draw a supply and demand graph for an industry

that creates external costs with its production. Compare and contrast

the market-determined price and output level with the socially optimal

price and output levels.

FIGURE 5.3 Market Failure: Externalities

FIGURE 5.3 Market Failure: Externalities Price Spriv External PI benefits P2 D Quantity When social returns exceed private returns, markets produce less than the opti- mum and sell it at too high a price