Essays on Global Inefficiencies and Externalities

Abstract

This dissertation examines global inefficiencies and externalities that hinder optimal production, consumption, and resource allocation, and explores policy interventions that improve aggregate welfare. While a frictionless world without externalities would require no policy response, real-world economies face persistent distortions and externalities that require active intervention. Given the deep interconnectedness of countries through trade and shared environmental challenges, understanding inefficiencies and externalities, which may be common across countries or differ by country, is critical for designing effective policies that enhance both domestic and global welfare.Chapter 2 investigates the drivers of persistent trade imbalances in eight advanced and emerging economies between 2000 and 2014. Using a dynamic general equilibrium framework, I find that economy-specific intertemporal distortions, especially in the United States, are central to understanding global imbalances. Bilateral trade frictions, particularly those involving China, also play a pivotal role. Without China's accession to the WTO, the United States would have sustained persistent trade surpluses, while China would have run persistent deficits, underscoring the importance of bilateral trade costs in shaping trade imbalances.Chapter 3 examines the global climate externality from carbon emissions and evaluates the effectiveness of climate policies in reducing global emissions. Using a dynamic general equilibrium model of the global economy, I show that limited mobility of capital and labor across sectors reduces the effectiveness of climate policies in lowering emissions. I find that subsidies on non-fossil fuel energy sources alone may unintentionally raise global emissions by boosting aggregate output unless combined with carbon taxes. These findings underscore the need to improve factor mobility and use complementary policy instruments to enhance climate mitigation efforts.Chapter 4 (co-authored with Chiara Maggi and Alexandre Sollaci) analyzes the welfare consequences of trade fragmentation in global commodity markets when inefficiencies arise from market power and its endogenous response to trade disruptions. Using a quantitative general equilibrium framework that incorporates international trade, firm heterogeneity, variable markups, and commodity-specific features, we show that trade fragmentation leads to substantial welfare costs, amplified by the increased market power of regional suppliers. The results highlight how market power exacerbates the welfare losses from commodity trade fragmentation.