1
Basic Tariff Analysis Basic Tariff Analysis
Figure 8-2: Deriving Foreign’s Export Supply Curve
§ Properties of the import demand curve:
• It intersects the vertical axis at the closed economy Price, P S* Price, P
XS
price of the importing country.
• It is downward sloping. P2
importing country.
P *A
D*
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MD
QW Quantity, Q
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Basic Tariff Analysis Basic Tariff Analysis
Figure 8-4: Effects of a Tariff
• In the absence of tariff, the world price of wheat (Pw)
Home market
Home market World
World market
market Foreign
Foreign market
market would be equalized in both countries.
Price, P Price, P Price, P • With the tariff in place, the price of wheat rises to PT at
S S*
XS Home and falls to P*T (= P T – t) at Foreign until the
price difference is $t.
2 – In Home: producers supply more and consumers demand
PT 1
PW
t
less due to the higher price, so that fewer imports are
P *T
3 demanded.
– In Foreign: producers supply less and consumers demand
MD more due to the lower price, so that fewer exports are
D* supplied.
D
Quantity, Q QT QW Quantity, Q Quantity, Q – Thus, the volume of wheat traded declines due to the
imposition of the tariff.
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D
S1 S2 D2 D1 Quantity, Q
Imports after tariff
Imports before tariff
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Costs and Benefits of a Tariff Costs and Benefits of a Tariff
§ A tariff raises the price of a good in the importing § Consumer and Producer Surplus
country and lowers it in the exporting country. • Consumer surplus
§ As a result of these price changes: – It measures the amount a consumer gains from a purchase
• Consumers lose in the importing country and gain in by the difference between the price he actually pays and
the price he would have been willing to pay.
the exporting country
– It can be derived from the market demand curve.
• Producers gain in the importing country and lose in the
– Graphically, it is equal to the area under the demand curve
exporting country
and above the price.
• Government imposing the tariff gains revenue – Example : Suppose a person is willing to pay $20 per
§ To measure and compare these costs and benefits, we packet of pills, but the price is only $5. Then, the
need to define consumer and producer surplus. consumer surplus gained by the purchase of a packet of
pills is $15.
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P1
$12 b
$10 P2
$9
D
D
8 9 10 11 Quantity, Q Q1 Q2 Quantity, Q
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Q1 Q2 Quantity, Q
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Costs and Benefits of a Tariff Costs and Benefits of a Tariff
Figure 8-9: Costs and Benefits of a Tariff for the Importing Country
§ Measuring the Cost and Benefits
Price, P S
• Is it possible to add consumer and producer surplus?
– We can (algebraically) add consumer and producer = consumer loss (a + b + c + d)
surplus because any change in price affects each = producer gain (a)
individual in two ways:
PT = government revenue gain (c + e)
– As a consumer
a b c d
– As a worker PW
e
– We assume that at the margin a dollar’s worth of gain or P *T
loss to each group is of the same social worth.
D
S1 S2 D2 D1 Quantity, Q
QT
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= consumer loss
= efficiency loss ( b + d)
(a + b + c + d )
= terms of trade gain ( e) = producer gain (a)
Price in U.S. Market 466
PT = quota rents ( c)
a b c d
b d World Price 280
PW
e
P *T
Demand
D
5.14 6.32 8.45 9.26 Quantity of sugar,
Quantity, Q
million tons
Imports Import quota:
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2.13 million tons Slide 8- 30