Transcript Trade Policy Tariff P* P P S XS PT PW t PW D Q Home MD Q QT QW World PT* Q Foreign A Tariff raises the price in Home,while lowering the price in Foreign; Volume of trade declines.

Trade Policy
Tariff
P*
P
P
S
XS
PT
PW
t
PW
D
Q
Home
MD
Q
QT QW
World
PT*
Q
Foreign
A Tariff raises the price in Home,while lowering the price in
Foreign; Volume of trade declines.
Welfare Losses from a Tariff
• Welfare Losses
P
P
PT  PT * (1  t )
PT
PW
PW
PT
PT*
*
1
2
2
1
S S D D

import before
Q
a
b c
e
d
Q
Consumer Loss=a+b+c+d
Producer Gain=a
Government Revenue=c+e
Net loss=b+d-e
e=0 , for a small country
Symmetries
I.
Perfect Competition
Import Quota = Import Tariff
S
Pi
D-Q
PQ
PW
D
P
i
Qi
Qi
Export Subsidy: Gains Losses
S
P
PS
S
PW
PS*
a b
c
e f
d
g
D
Q
Producer gain=a+b+c
Consumer loss=a+b
Cost of government subsidy=b+c+d+e+f+g
Total gain=-(b+d+e+f+g)
Tariff & Quota in the Presence of
Monopoly
P
MC
PM
PW
MR
D
Q
Qf QM
A Monopolist Protected
by a Tariff
MC
PM
PW  t
PW
D
MR
QF Qt QM
Dt
Df
Q
A Monopolist Protected
by a Quota
MC
2
Pq
2
Rent
PW
1
1
D
MRq
Qq
im portsquota  Q
Dq  D  Q
Dq
Comparing a Tariff and a Quota
with Same Imports
MC
Pq
Pw  t
PW
D
MRq
Qt
Dq
Export Tax and Import Tariff
• Export Tax
PX
PM
• Import Tariff
PM
PX
S
D
PT
PS*
PW
PW
PT*
PS
D
S
M
X
X=Export Good
Y=Import Good
Migration
Wage in
Country S
Wage in
Country D
WDA
WSA
MPLD
B

A
Migration
from S to D
OD
LS  LD
OS