Overview: Transport Costs and Borders

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This group of readings examines exchange when distance and political borders exist. Distance gives rise to transport or traveling cost—buyers must expend time and effort to purchase from a seller. This cost affects behavior and economic efficiency. Two attempts to explain the effects of transport costs are Hotelling's model and the model of monopolistic competition.

Although national borders are irrelevant for economic efficiency, they are very relevant for political incentives, so economists have often been critics of government trade policies.

A key argument that ties these very different topics together is that decreasing the costs of making transactions, whether it be by reducing transportation costs or lowering man-made barriers to trade such as tariffs, increases consumer choice and thus economic efficiency.

After you complete this unit, you should be able to:

  • Define comparative advantage, tariff, quota, terms of trade, zero-sum game, positive-sum game, and negative-sum game.
  • Compute opportunity costs when given information about production possibilities.
  • Explain what the Hotelling model says about the behavior of political candidates.
  • Explain why traveling costs can create unexploited value.

Copyright Robert Schenk