chapter vii: tariffs and quotas

Lectured by: SOK Chanrithy

CHAPTER VII: Tariffs and Quotas

I. IntroductionProtective trade policyHelp domestice producers from int

competitionsGovernment revenueDefinitionLook closely to the direct effect of

relatively simple tariff and quotas.Review of fixed and Valorem tariffs by

small and large countryTariff and Quotas are similar market

consequencesSimple analystics of eco welfare changedMaximum revenue tariff

I. IntroductionHelp domestic producers from

international competitionsGovernment revenueLook closely to the direct effect of

relatively simple tariff and quotas.Review of fixed and Valorem tariffs by

small and large countryTariff and Quotas are similar market

consequencesSimple analytics of eco welfare changed

II. Tariff1. Small Nation

Fixed tariff “fixed rate”Example: 20c per pound of tobacco1st small nation put import tariff

=> not effect to international priceShow Graph

S

D

ES (R)

ED

pp

q qm0

p1

Domestic Market International Market

Small Country Importer

imports

qs qd

Ad valorem tariff: percentage of the international price rather than a fixed price unit amount.

Explain graph

S

D

ES (R)

ED

pp

q qm0

p1

Domestic Market International Market

Small Country Importer

imports

qs qd

S

D

ES (R)

ED

pp

q qm0

p1

Domestic Market International Market

imports

qs qd

p2t

p1

Small Country Importer with Tariff t, page1

S

D

ES (R)

ED

pp

q qm0

p1

p2

Domestic Market International Market

Small Country Importer with Tariff t, page 2

t

ED*

t = p2 – p1

qs qdqs*qd* qm*

p1

t

ED* --excess demand as the ROW sees it

a b

c d

The tariff raises the price in the importing country to p2 = p1 + t. This means that domestic suppliers will increase quantity supplied and consumers will reduce quantity demanded. Excess demand declines.

S

D

p

q

p1

p2

Domestic Market

Welfare effects of Small Country Importer with Tariff t

t

t = p2 – p1

qs qdqs*qd*

a b

c dA

B DC

Welfare effects of an Import Tariff

Importing Country

Consumer Surplus

-(A + B + C + D)

Producer Surplus

+ A

Gov’t Revenue

+ C

National Welfare

- B - D

a b c d e f

EDB

SAESA SB

DBDA

p1

qsaqda qdbqsb

Country A(Exporter)

Country B(Importer)

InternationalMarket

qt

t

Effect of a Tariff, Large Country Case—page 1The large country case is different because the tariff cannot be simply added to the import price. Any change in Excess Demand will cause a change in world prices.

The tariff acts as a wedge between EDB and ESA.

a b e f

EDB

SAESA SB

DBDA

p1

qsaqda qdbqsb

Country A(Exporter)

Country B(Importer)

InternationalMarket

qt

t

Effect of a Tariff, Large Country Case—page 2

EDB

SAESA SB

DBDA

p1

qsaqda qdbqsb

Country A(Exporter)

Country B(Importer)

InternationalMarket

qt

t

EDB

Effect of a Tariff, Large Country Case—page 3

EDB

SAESA SB

DBDA

p1

qsaqda qdbqsb

Country A(Exporter)

Country B(Importer)

InternationalMarket

qt

t

Tariff revenues

Effect of a Tariff, Large Country Case—page 4

Large Country Tariff Welfare Effects

We will look at the welfare effects of a tariff on large country traders in two sections—one for the importer and one for the exporter. I have flattened out the curves a little to make the welfare components easier to identify.

EDB

ESA

SB

DB

qdbqsb

Country B(Importer)

InternationalMarket

qt

tp2

p3

p1

AB DC

Welfare Effects of Tariff, Importer Side, Large Country Case

p3

q*t

p1

ED*B

Gain (+) / Loss (<>)

Producer A

Consumer <A+B+C+D>

Gov’t* C + E

Net Nat’l gain/loss

E – (B + D)

E

t

The importer tariff of t drives up prices in the importer country from free trade price of p1 to price p2. It also drives down the world price to p3. Importer welfare effects reflect changes from free trade prices and quantities (black) to tariff-restricted prices and quantities (red).

*C+E are tariff revenues

SA

DA

p1

qsaqda

Country A(Exporter)

Tariff revenues

Welfare Effects of Tariff, Exporter Side, Large Country Case

EDB

ESA

InternationalMarket

qt

p2

p3T

U W

V

ED*B

q*t

p3

t

Gain (+) / Loss (<>)

Producer <T+U+V+ W>

Consumer +T

Gov’t --

Net Nat’l gain/loss

<U+V+ W>

The tariff (it could also be a quota or other trade restriction) by the importer drives down the world price from free trade price p1 to price p3. Exporter welfare effects reflect the changes from the original free trade world market prices and quantities (black) to tariff-restricted world prices and quantities (red).

III.Quotas A binding quotas: the amount that

below the world quantities occur. If the quota is larger than free trade it has no

real effect.Price in domestic will rise and producer will

extend output.Small Country CaseLarge country Case