Victor Norman

Advertising and Welfare

This paper applies conventional welfare-theoretic methods to study advertising which changes consumer tastes. In a wide range of empirically plausible circumstances, private profitability is seen to be necessary but not sufficient for the social desirability of a small amount of advertising. The market equilibrium level of such advertising is shown to be socially excessive, even when postadvertising tastes are used as the standard for welfare judgments and the monopoly profits resulting from the advertising are included in welfare. Settings of monopoly, oligopoly, and monopolistic competition are examined, and the contention that advertising is excessive is found to be strengthened at each stage.

Gains from trade without lump-sum compensation

Abstract This paper examines the possibility of designing a free-trade equilibrium that is Pareto superior to a given autarkic one, using redistributive tools other than lump-sum transfers. It is shown that (i) if the production frontier allows some non-zero transformation in the neighbourhood of autarky, and (ii) there is a commodity, pure or composite, for which no two consumers trade on opposite sides of the market, then taxes and subsidies on goods and factors suffice for the purpose. If uniform poll subsidies are available, then condition (ii) is not needed. Such policies are compatible with incentive-compatibility constraints, while lump-sum transfers are not.

Assessing trade and welfare effects of trade liberalization: A comparison of alternative approaches to CGE modelling with imperfect competition

Abstract Several numerical model experiments are used to contrast computable general equilibrium (CGE) models explicitly incorporating imperfect competition with on the one hand ‘textbook’ comparative-advantage models and on the other hand competitive models based on the Armington approach. Imperfect competition has significant effects on inter-industry trade and welfare effects of trade liberalization. Less aggressive competition reduces elasticities of equilibrium quantities so that comparative advantage is not fully exploited. The Armington approximation is found to be a poor substitute for explicit incorporation of oligopolistic interaction and product differentiation at the firm level.

Technological change and factor mix over the product cycle: A model of dynamic comparative advantage

Abstract This paper presents a simple dynamic model of how, for a given set of factor prices, the optimizing mix of factor inputs changes over a product cycle, and of how (as a result) comparative advantage in international trade shifts. The model is designed to be consistent with, and to explain, the following stylized facts. When a new technology comes into being, follow-on improvements of the original basic design tend to occur at a rapid rate. Opportunities for improvement and the nonroutinized nature of the production process put a premium on flexibility and insight. As the technology settles down, the premium placed on problem solving ability declines, obsolescence of equipment occurs less rapidly, and unskilled workers and machinery are substituted for skilled workers.

International Trade, Factor Mobility and Trade Costs

We consider a Heckscher-Ohlin model in which goods and factors of production can be traded, but trade involves transactions costs. Goods trade alone will not equalize factor prices, so there is an incentive for trade in factors of production. Whether goods or factors are traded depends on endowments and transactions costs. We characterize equilibria in which there is no trade, there is goods trade only, there is factor trade only, and there is trade in both goods and factors. This generalizes the Heckscher-Ohlin model to explain not only the direction of trade, but also the prior question of how goods and factors are partitioned to tradables and non-tradables.

Advertising and Welfare: Another Reply

U Shapiros comment (1980) concerns two distinct points that arise from the recognition of heterogeneity of consumers. The first involves no change of tastes. Rather, consumers are distinguished by whether or not they have received the advertising message, with those not reached being barred from the market altogether. Reaching a new consumer thus relaxes a constraint facing him, or equivalently, lowers the price he faces from ox to a finite level p. Here Shapiros conclusion is correct: a monopolist advertises too little. For an earlier treatment of this case, see Diamond and Rothschild (1978, p. 490). The second case involves a change of tastes, and the issue is the validity of aggregate consumer surplus diagrams. However, questioning a diagrammatic illustration is not the same as proving the result invalid. Proper algebraic analysis in fact extends our result to the many-consumer case: if advertising raises the market price, then a slight reduction in the amount of advertising below the monopolists profit-maximizing level is socially desirable according to the welfare standard under this level of advertising. In the notation of our earlier article, let consumer hs demand be generated by the utility function,

Agglomeration, tax competition and local public goods supply

In this paper we develop a framework for studying tax competition and local public goods supply in a setting where real and fiscal externalities interact with local democracy. We use the framework (a) to analyse if there is any reason to believe that local autonomy generally will give a tax race to the bottom (there is not), and (b) to look more closely at possible sources of oversupply or undersupply of publicly provided goods in a setting where local democracies compete for people. We identify two potential sources – the relationship between individual mobility and willingness to pay for publicly provided goods, and the mobility distribution of individuals (i.e. the distribution of individuals over residential preferences). The two could reinforce each other in a local democracy if the majority of the residents in a community are relatively mobile (the “American” case), while they would pull in opposite directions if the majority of residents are relatively immobile (the “European” case).

Theory of International Trade: THE THEORY OF INTERNATIONAL TRADE

This book expounds trade theory emphasizing that a trading equilibrium is general rather than partial, and is often best modelled using dual or envelope functions. This yields a compact treatment of standard theory, clarifies some errors and confusions, and produces some new departures. In particular, the book (i) gives unified treatments of comparative statics and welfare, (ii) sheds new light on the factor-price equalization issue, (iii) treats the modern specific-factor model in parallel with the usual Heckscher-Ohlin one, (iv) analyses the balance of payments in general equilibrium with flexible and fixed prices, (v) studies imperfect competition and intra-industry trade.

A Future for Nordic Shipping

This book has looked at the varied experience of Nordic shipping over the past decades. In this concluding chapter I shall try to use this as a basis for looking ahead. The aim is not to predict what will happen, but to identify issues that could be critical for the future of shipping companies based in the Nordic countries and thus provide a framework which may be useful when assessing the future potential for shipping based in that area.

MONEY AND THE BALANCE OF PAYMENTS

It is common in elementary textbooks to introduce balance of payments adjustment as a manifestation of real disequilibrium. If relative prices are not compatible with clearance of all goods markets, as can happen when enough nominal prices and exchange rates are sticky, then the real imbalances will be reflected in payments imbalances. Each country will, given its competitive assumption that it can transact at the going market prices, plan to remain on its budget constraint, but since all these trades are not mutually compatible in disequilibrium, each will in fact end up violating the constraint. An example will clarify this. Suppose that in a pure exchange of goods, the equilibrium price ratio between UK and Japan would be 62.5 bottles of whisky per television set. Now suppose the UK price of whisky is sticky at ℒ4 per bottle, and the Japanese price of TV sets at 100,000 yen per set. This will be compatible with equilibrium at an exchange rate of 400 yen/ℒ. But suppose this rate is also sticky at a value of 450. Then the Japanese can exchange each TV set for only 55 bottles of whisky, and the UK needs to offer only 55 bottles to acquire one TV set. Given a stability condition, called the Marshall- Lerner condition, there will be a world excess demand for TV sets and an excess supply of whisky. If trade is attempted under these prices, we will observe a UK balance of payments deficit: If they could sell all their whisky they would operate on their budget constraint, but in the prevailing state of real disequilibrium this plan fails to materialize.