Questions on Manufactures

1. Questions on Manufactures • 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 (c) 2001, J. Douglass Klein

2. Questions on Manufactures What IDEAL WORLD does Hamilton describe {214} (986) [295], and how is this world different from the real world? (c) 2001, J. Douglass Klein

3. P SB S’ Marginal Cost S’’ Average Cost S’’’ Pw + T T PW World Supply PW DB q Q qf1 QD1 QS1 One typical British corn farmer Entire British corn market Effects of a Tariff P Pw+T What happens in the LONG RUN? 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? (c) 2001, J. Douglass Klein

4. Total Tariff Revenue P+T* P+T P+0 D Q T 0 T T* 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) (c) 2001, J. Douglass Klein

5. 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. Income Tax Revenue Tax rate 0 T T* LAFFER CURVE (c) 2001, J. Douglass Klein

6. 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) (c) 2001, J. Douglass Klein

7. Internal Improvements - 1820 (c) 2001, J. Douglass Klein

8. Internal Improvements - 1840 (c) 2001, J. Douglass Klein

9. Internal Improvements - 1870 (c) 2001, J. Douglass Klein

10. Miles of Canals (c) 2001, J. Douglass Klein

11. Miles of Railroads (c) 2001, J. Douglass Klein

12. Internal Improvements Assignment Read about market failures in an Intro. Textbook, or see http://www.best.com/~ddfr/Academic/Price_Theory/PThy_Chapter_18/PThy_Chap_18.html http://www.udel.edu/johnmack/frec424/424lec03.html http://elmo.shore.ctc.edu/economics/market.htm http://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? (c) 2001, J. Douglass Klein

13. Internal Improvements Who should pay for internal improvements? Government - Federal - State - Local Private investors (c) 2001, J. Douglass Klein

14. 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? (c) 2001, J. Douglass Klein

15. Albert Gallatin’s Plan, 1808 “… 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) (c) 2001, J. Douglass Klein

16. Albert Gallatin’s Plan, 1808 In the US: Capital is scarce Investment alternatives are many Population 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 (c) 2001, J. Douglass Klein

17. Sources of Market Failure 1. Monopoly Power P > MC and P > AC Profits persist in the long run 2. Externalities in production or consumption costs or benefits accrue to 3rd parties 3. Public goods non-exclusive and non-rival benefits indivisibly spread over community (c) 2001, J. Douglass Klein

18. Sources of Market Failure All of these drive a wedge between MARGINAL SOCIAL COST and MARGINAL SOCIAL BENEFIT (c) 2001, J. Douglass Klein

19. Price Marginal Social Cost P1 Marginal Social Benefit Quantity Q1 Competition (c) 2001, J. Douglass Klein

20. Price Marginal Social Cost PM P1 MCM Marginal Social Benefit Quantity Q1 QM Monopoly Restricts output and raises price. Profits exist, and barriers to entry prevent competition from eroding those profits. MSB > MSC (c) 2001, J. Douglass Klein

21. Price Marginal Social Cost MSB P1 Market Price Marginal Social Benefit Marginal Private Benefit Quantity Q2 Q1 Externality (positive) 3rd parties receive benefits who are not part of the original transaction. (c) 2001, J. Douglass Klein

22. Price MSB Marginal Social Cost P1 Marginal Social Benefit Market Price Marginal Private Benefit Quantity Q1 Public Goods Q2 Everyone in society benefits, and none can be excluded. There is likely to be a free rider problem. (c) 2001, J. Douglass Klein

23. Assignment Quiz number 2 on Friday, covers Manufactures and Internal Improvements Finish Internal Improvements Look for both Constitutional and Economic arguments over funding of internal improvements. (c) 2001, J. Douglass Klein