a’s offer curve
DESCRIPTION
Charles van Marrewijk. A’s offer curve. We have seen how to derive an ‘offer curve’, showing combinations of. A’s import. exports offered in exchange for imports at different price levels. A’s export. “Optimal” tariffs; 1. Charles van Marrewijk. - PowerPoint PPT PresentationTRANSCRIPT
A’s offer curve
We have seen how to derive an ‘offer curve’, showing combinations of
exports offered in exchange for imports at different price levels.
Charles van Marrewijk
“Optimal” tariffs; 1
A’s import
A’s export
Look at point C; on the price line it is the best deal available to country A
Obviously, if country A would get more imports for the same exports its welfare would rise
A’s import
A’s export
A’s offer curve
C
Charles van Marrewijk
“Optimal” tariffs; 2
U0
U2
Welfare for country A increases to the north-west: U0 < U1 < U2
A’s import
A’s export
U1
A’s offer curve
This implies that through each point on the offer curve we can draw an
Iso-welfare curve for country A. This curve must be tangent to the price line from the origin through that point.
Charles van Marrewijk
“Optimal” tariffs; 3
U0
U2
Maximizes country A’s welfare given this restriction at point D: no tariffs
An omniscient central planner
A’s import
A’s export
U1
A’s offer curve
If country A is a country
ROW offer curve
D
Charles van Marrewijk
“Optimal” tariffs; 4
small The offer curve it faces from the Rest of the World (ROW) is a straight line (country A cannot influence its terms of trade)
ROW offer curve
U0
U2
does not maximize country A’s welfare given this restriction at point D
An omniscient central planner
A’s import
A’s export
U1
A’s offer curve
If A is a country The ROW offer curve is not a straight
line (country A can influence its terms of trade)
large
D
Charles van Marrewijk
“Optimal” tariffs; 5
U0
U2
using an “optimal” tariff such that the new offer curve intersects at point E
Country A’s offer curve
A’s import
A’s export
U1
old A’s welfare the ROW offercurve is maximized at point E
This gives the central planner an incentive to manipulate
given
DROW offer curve
U3
E
new
Charles van Marrewijk
“Optimal” tariffs; 6
Through each point on the ROW offer curve is an iso-welfare curve tangent to a line through the origin. ROW
export
ROW import
For ROW, however, the situation is reverse
Welfare increases to the south-east
Charles van Marrewijk
“Optimal” tariffs; 7
ROW export,A’s import
ROW import, A’s export
ROW, therefore, has an incentive to manipulate
D
F new
Charles van Marrewijk
“Optimal” tariffs; 8
its offer curve through ‘optimal’ tariffs to go from point D to point F
ROW wants to be clever to move from D to F
ROW export,A’s import
ROW import, A’s export
D
F
new
new
E
G
The end result of all this cleverness is a move from D to G; everyone is worse off
retaliation
Charles van Marrewijk
“Optimal” tariffs; 9
may worsen the situation
Further
A wants to be clever to move from D to E