Which of the following best explains how trade agreements can affect the location of jobs in the context of externalities?

• A. Trade agreements may lead to jobs moving to countries where production costs are lower, even if those countries do not internalize negative externalities.
• B. Trade agreements prevent the relocation of jobs by imposing tariffs on all imported goods.
• C. Trade agreements always ensure that jobs remain in countries with the strictest environmental regulations.
• D. Trade agreements have no impact on the distribution of jobs between countries.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of externalities in microeconomics. Externalities occur when the production or consumption of a good affects third parties who are not directly involved in the transaction. Negative externalities, such as pollution, impose costs on society that are not reflected in the market price.
2. Step 2: Recognize that trade agreements reduce barriers to trade, such as tariffs and quotas, making it easier and cheaper for firms to move production across borders.
3. Step 3: Analyze how firms respond to trade agreements by relocating production to countries with lower production costs. These lower costs may be due to cheaper labor, less stringent environmental regulations, or failure to internalize negative externalities (e.g., pollution costs).
4. Step 4: Understand that when countries do not internalize negative externalities, firms can save money by producing there, which can lead to job shifts from countries with strict regulations to those with lax regulations.
5. Step 5: Conclude that trade agreements can influence the location of jobs by enabling firms to move production to countries with lower costs, including those that do not account for negative externalities, thus affecting the distribution of jobs internationally.