(c) 2001, j. douglass klein questions on manufactures 1.near the beginning of the report, there is a...

(c) 2001, J. Douglass Klein

Questions on Manufactures1. Near the beginning of the Report, there is a lengthy quotation … What is

the point of this passage? How does Hamilton address the issues raised.

2. List and briefly explain the seven arguments which begin on page 980, for why manufacturing is important to a society. (A answers 1,2; B=3,4; C=5,6,7

3. Do you think that Hamilton’s arguments in favor of protecting US manufacturing fall under one of Adam Smith’s criteria for protection or not. See in particular Hamilton’s discussion beginning on page 986. (2 different groups)

5. List and briefly explain the eleven different ways to encourage manufacturing. (These begin around page 1008.) Try to use supply and demand graphs to illustrate some of them. If you draw a NEAT graph, I’ll post it. (A=1,2; B=3,4,5; C=6,7,8; D=9,10,11.

1 2A 2B 2C 3 5A 5B 5C 5D


Questions on Manufactures

What IDEAL WORLD does Hamilton describe {214} (986) [295], and how is this world different from the real world?


Effects of a TariffP

What happens in the LONG RUN?

T

Pw + TPw+T

Q

P SB

DB

q

Marginal Cost

AverageCost

WorldSupply

PWPW

One typical British corn farmer Entire British corn market

qf1 QS1 QD1

In the LONG RUN, entry can occur. So long as profits exist, entry will continue.How do we show entry on the graph?

How far will the British Supply curve shift?

S’

S’’S’’’


Effects of Higher Duties “The possibility of a diminution of revenue may present itself … but … the interests of revenue are promoted by whatever promotes an increase of national industry and wealth.” (281)

T

Total Tariff Revenue

0 T T*

P+0

P+T

Q

P+T*

D


Effects of Higher Duties This idea was raised in the early 1980s by Arthur Laffer, an economic advisor of President Ronald Reagan, to justify an income tax cut, even with a large deficit.

Tax rate

Income Tax Revenue

0 T T*

LAFFER CURVELAFFER CURVE


Manufacturing and Sectionalism

Does protection of manufacturing increase sectional rivalries between, say, North and South?

“Mutual wants constitute one of the strongest links of political connection…” (241)

“The extensive cultivation of cotton can … hardly be expected but from the previous establishment of domestic manufactories of the article…” (243)


Internal Improvements - 1820


Miles of Canals

0

4000

8000

12000

16000

20000

24000

28000

32000

1816 1830 1840 1850 1860

Miles of Canals


Miles of Railroads

0

4000

8000

12000

16000

20000

24000

28000

32000

1816 1830 1840 1850 1860

Miles of Railroads

Miles of Canals


Internal Improvements

Assignment

Read about market failures in an Intro. Textbook, or seehttp://www.best.com/~ddfr/Academic/Price_Theory/PThy_Chapter_18/PThy_Chap_18.htmlhttp://www.udel.edu/johnmack/frec424/424lec03.htmlhttp://elmo.shore.ctc.edu/economics/market.htmhttp://www.amosweb.com/cgi-bin/gls_dsp.pl?term=market+failure

Read the sections on Internal Improvements.What reasons for or against internal improvements does each author give?What objections to internal improvements are raised?

http://www.best.com/~ddfr/Academic/Price_Theory/PThy_Chapter_18/PThy_Chap_18.html

http://www.udel.edu/johnmack/frec424/424lec03.html


Internal Improvements

Who should pay for internal improvements?

Government - Federal - State - Local

Private investors


Albert Gallatin’s Plan, 1808

System of canals to facilitate coastal shipping

Great north-south road from Maine to Georgia

East-west roads to connect eastern and western rivers

Total cost $20 million to be paid by tariff revenue and sale of public lands

What were Gallatin’s reasons for requesting federal support?



“… in countries possessed of a large capital, where property is sufficiently secure to induce individuals to lay out that capital on permanent undertakings, and where a compact population creates an extensive commercial intercourse, within short distances, those improvements may often … be left to individual exertion, without any direct aid from government.” (388)



In the US:

Capital is scarceInvestment alternatives are manyPopulation density is low“the first canal will remain comparatively unproductive until the other improvements are effected…” (389)

The general government can alone remove these obstacles


Sources of Market Failure

1. Monopoly Power P > MC and P > ACProfits persist in the long run

2. Externalities in production or consumptioncosts or benefits accrue to 3rd parties

3. Public goodsnon-exclusive and non-rivalbenefits indivisibly spread over community


Sources of Market Failure

All of these drive a wedge between

MARGINAL SOCIAL COSTand

MARGINAL SOCIAL BENEFIT


Competition

Marginal Social Benefit

Marginal Social Cost

Price

QuantityQ1

P1


Monopoly



Price

QuantityQ1

P1

QM

PM

MCM

Restricts output and raises price. Profits exist, and barriers to entry

prevent competition from eroding those profits. MSB > MSC


Externality (positive)



Price

QuantityQ1

P1

Marginal Private Benefit

Market Price

MSB

Q2

3rd parties receive benefits who are not part of the original transaction.


Public Goods



Price

QuantityQ1

P1

Marginal Private BenefitMarket Price

MSB

Q2

Everyone in society benefits, and none can be excluded. There is likely to be a free rider problem.


Assignment

Quiz number 2 on Friday, covers Manufactures and Internal Improvements

Finish Internal Improvements

Look for both Constitutional and Economicarguments over funding of internal improvements.

(c) 2001, j. douglass klein questions on manufactures 1.near the beginning of the report, there is a...

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