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CHAPTER VII: Tariffs and Quotas. Lectured by: SOK Chanrithy. I. Introduction. Protective trade policy Help domestice producers from int competitions Government revenue Definition Look closely to the direct effect of relatively simple tariff and quotas. - PowerPoint PPT Presentation
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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
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