Transcript Chapter 7 - Sok Chanrithy`s WEB

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.
 Review of fixed and Valorem tariffs by small and large
country
 Tariff and Quotas are similar market consequences
 Simple analystics of eco welfare changed
 Maximum revenue tariff
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I. Introduction
 Help domestic producers from international competitions
 Government revenue
 Look closely to the direct effect of relatively simple tariff
and quotas.
 Review of fixed and Valorem tariffs by small and large
country
 Tariff and Quotas are similar market consequences
 Simple analytics of eco welfare changed
II. Tariff
1. Small Nation
Fixed tariff “fixed rate”
 Example: 20c per pound of tobacco
 1st small nation put import tariff
=> not effect to international price
 Show Graph
Small Country Importer
p
p
S
p1
ES (R)
imports
qs
D
qd
Domestic Market
ED
q
0
qm
International Market
 Ad valorem tariff: percentage of the international price
rather than a fixed price unit amount.
 Explain graph
Small Country Importer
p
p
S
p1
ES (R)
imports
qs
D
qd
Domestic Market
ED
q
0
qm
International Market
Small Country Importer with Tariff t, page1
p
p
p2
p1
S
t
p1
imports
qs
ES (R)
D
qd
Domestic Market
ED
q
0
qm
International Market
Small Country Importer with Tariff t, page 2
p
p
S
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.
t = p2 – p1
p2
p1
c
d
t
a
p1
b
ES (R)
t
D
qs qs*
qd*q
d
Domestic Market
ED*
q
0
ED
qm* qm
International Market
ED* --excess demand as the ROW sees it
Welfare effects of Small Country Importer with Tariff t
p
S
Welfare effects of an Import Tariff
Importing Country
t = p2 – p1
t
p2
p1
c
A
B
C
a
b
d
D
D
qs qs*
qd*q
d
Domestic Market
q
Consumer
Surplus
-(A + B + C + D)
Producer
Surplus
+A
Gov’t
Revenue
+C
National
Welfare
-B-D
Effect of a Tariff, Large Country Case—page 1
The 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.
ESA
SA
p1
a
qda
Country B
(Importer)
International
Market
Country A
(Exporter)
b
c
t
d
DA
EDB
qsa
qt
The tariff acts as a wedge between EDB and ESA.
SB
e
f
DB
qsb
qdb
Effect of a Tariff, Large Country Case—page 2
ESA
SA
p1
a
qda
Country B
(Importer)
International
Market
Country A
(Exporter)
b
DA
qsa
t
SB
e
f
DB
EDB
qt
qsb
qdb
Effect of a Tariff, Large Country Case—page 3
Country B
(Importer)
International
Market
Country A
(Exporter)
ESA
SA
SB
t
p1
qda
DA
qsa
qt
EDB
DB
EDB
qsb
qdb
Effect of a Tariff, Large Country Case—page 4
Country A
(Exporter)
International
Market
Country B
(Importer)
ESA
SA
SB
t
p1
qda
DA
qsa
Tariff revenues
DB
EDB
qt
qsb
qdb
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.
Welfare Effects of Tariff, Importer Side, Large Country Case
Country B
(Importer)
International
Market
SB
ESA
A
p1
p3
p2
p1 t
p3
t
EDB
B
C
E
Gain (+) /
Loss (<>)
Producer
A
Consumer
<A+B+C+D>
Gov’t*
D
C+E
Net Nat’l
gain/loss
E – (B + D)
*C+E are tariff
revenues
ED*B
DB
qdb
qsb
q*t qt
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).
Welfare Effects of Tariff, Exporter Side, Large Country Case
Country A
(Exporter)
International
Market
SA
U
p1
T
p3
W
V
Gain (+) /
Loss (<>)
ESA
p2
p3
t
EDB
Producer
<T+U+V+ W>
Consumer
+T
Gov’t
--
Net Nat’l
gain/loss
<U+V+ W>
ED*B
Tariff revenues
DA
qda
qsa
q*t qt
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 Case
 Large country Case