Presentation is loading. Please wait.

Presentation is loading. Please wait.

TARIFFS & QUOTAS. TARIFFS ---- MAINLY IMPOSED AS INDUSTRY PROTECTION SOME REVENUE GENERATING PURPOSES AS WELL IMPORT TARIFFTARIFF ON IMPORTED ITEMS ---

Similar presentations


Presentation on theme: "TARIFFS & QUOTAS. TARIFFS ---- MAINLY IMPOSED AS INDUSTRY PROTECTION SOME REVENUE GENERATING PURPOSES AS WELL IMPORT TARIFFTARIFF ON IMPORTED ITEMS ---"— Presentation transcript:

1 TARIFFS & QUOTAS

2 TARIFFS ---- MAINLY IMPOSED AS INDUSTRY PROTECTION SOME REVENUE GENERATING PURPOSES AS WELL IMPORT TARIFFTARIFF ON IMPORTED ITEMS --- MOST WIDELY USED EXPORT TARIFFLESS FREQUENTLY USED -- BUT USED BY DEVELOPING NATIONS TO SOME EXTENT SPECIFIC TARIFF: $1000 TARIFF ON $20,000 ITEM IS MORE DISCOURAGING THAN $1,000 ON A $25,000 ITEM AS IMPORT PRICES, THE PROTECTION EFFECT DECLINES

3 AD VALOREM TARIFF AD VALOREM TARIFF --- % OF THE PRICE OR VALUE DUTY IMPORT A $20,000 ITEM AND PAY MORE AT A FIXED % THAN IF ONE IMPORTS A $19,000 ITEM THIS TYPE OF TARIFF MAINTAINS A CONSTANT DEGREE OF PROTECTION --- PARTICULARLY DURING PERIODS OF PRICE FLUCTUATION 20 % OF 200 = $40 20% OF 300 = $60 20 % OF 100 = $20 DETERMINING VALUE CAN BE A PROBLEM - ONE METHOD IS THE CUSTOM APPRAISAL METHOD - ANOTHER METHOD IS THE FOB VALUATION TARIFF APPLIES TO PRODUCT VALUE AS IT LEAVES THE EXPORTING NATION

4 CIF -- EUROPEAN METHOD (COST-INSURANCE-FREIGHT) COMPOUND TARIFF --- OFTEN APPLIED TO MANUFACTURED GOODS EMBODYING RAW MATERIALS THAT ARE SUBJECT TO TARIFFS SPECIFIC + AD VALOREM = TOTAL TARIFF - SPECIFIC TARIFF NEUTRALIZES COST DISADVANTAGE OF DOMESTIC MANUFACTURERS THAT RESULTS FROM TARIFF PROTECTION GRANTED DOMESTIC SUPPLIERS OF RAW MATERIALS - AD VALOREM TARIFF GRANTS PROTECTION TO FINISHED GOOD

5 COTTON PROTECTED THEN TEXTILE COSTS RISE COTTON PROTECTED THEN TEXTILE COSTS RISE SO SPECIFIC TARIFF ON TEXTILE IMPORTS TO PROTECT HIGH COST DOMESTIC TEXTILE INDUSTRY SO SPECIFIC TARIFF ON TEXTILE IMPORTS TO PROTECT HIGH COST DOMESTIC TEXTILE INDUSTRY EXAMPLE OF THE USE OF A COMPOUND TARIFF

6 EFFECTIVE RATE OF PROTECTION NOMINAL RATE = GENERAL RATE OF PROTECTION EFFECTIVE RATE = ACTUAL LEVEL OF PROTECTION EFFECTIVE RATE = TOTAL INCREASE IN DOMESTIC PRODUCTIVE ACTIVITIES (VALUE ADDED) THAT AN EXISTING TARIFF STRUCTURE MAKES POSSIBLE EFFECTIVE RATE = (n – a(b)) / 1 – a n= NOMINAL RATE ON FINISHED GOOD a = ratio of value of imported input to value of final product b = NOMINAL TARIFF RATE ON IMPORTED INPUT

7 HOW THE TARIFF TAKES EFFECT DOMESTIC PRODUCERSFOREIGN PRODUCTION IMPORTS COMPONENTSPRODUCES FOR $100 $80 ASSEMBLES FOR $20 COST = 100 /// IMPOSE TARIFF OF 10 % OF $100 = $10 /// SO IMPORT PRICE IS $100 + $10 = $110

8 EFFECTIVE RATE = 0.1 – 0.8(0)/ 1 – 0.8 = 0.5 SO NOMINAL 10 % ON FINISHED GOODS AFFORDS A 50 % EFFECTIVE RATE EFFECTIVE RATE IS 5 TIMES THE NOMINAL RATE HOME PRODUCERS GET 50 % PROTECTION VALUE OF IMPORTED INPUT DIVIDED BY VALUE OF FINISHED PRODUCT= a AS IMPORTED INPUTS ENTER WITH LOW TARIFF WHILE FINAL GOOD IS PROTECTED BY HIGH DUTY --- THEN GET A HIGH PROTECTION RATE FOR DOMESTIC PRODUCERS ONE INDUCES TARIFF ESCALATION

9 HOW DO MOST TEXTS CALCULATE THE EFFECTIVE RATE? EFFECTIVE RATE = (V – V)/V; NOMINAL RATE = TARIFF/PRICE V = DOMESTIC VALUE ADDED WITH NOMINAL TARIFF V = DOMESTIC VALUE ADDED WITH FREE TRADE OUR CASE?? NOMINAL PROTECTION IS TARIFF/PRICE = 10/100 = 10% EFFECTIVE RATE = (30 – 20)/20 = 0.5 = 50% OR AGAIN 5 TIMES THE NOMINAL RATE WHY? V = (110 – 80) = 30 AND V = (100 – 80) = 20 OR VALUE WITH TARIFF MINUS INPUT COST = 110 – 80 = 30 AND VALUE WITHOUT TARIFF MINUS INPUT COST = 100 – 80 = 20 ***** BUT USING (n – a(b)/ (1-a), allows us to look at the tariff on the finished good (or n) and tariffs on any inputs imported (b) ! Suppose n = 10% and a = 20/100 =.2, and b =.05?? Effective rate =.1-.2(.05)/(1 -.2) = ( )/.8 =.09/.8 =.1125 or 11.25%

10 THE CASE WE ARE USING: FOREIGN PRODUCERSDOMESTICPRODUCERS = ASSEMBLY TARIFF = COST PRICE = 110 INTERNAL COST COULD BE HIGH --NO INCENTIVE TO REDUCE COSTS IN FREE TRADE, THE IMPORT IS 100 DOMESTIC PRODUCER HAS TO REDUCE COST TO 20 TO COMPETE

11 BEFORE ANALYZING THE ECONOMIC WELFARE ISSUES OF A TARIFF WE NEED TO LOOK AT THE GAINS OF FREE TRADE AND THEN SEE HOW TARIFFS EFFECT THIS ECONOMIC WELFARE WE MOVE FROM POINT A UNDER AUTARKY TO POINT B ON A HIGHER CIC AT CIC 1 WHICH IS HIGHER THAN CIC O AND CAN MOVE TO POINT C ON CIC 2 WE ALSO GET A PRODUCTION EFFECT OF A MOVE FROM POINT A ON THE PPF TO A NEW POINT X – OVERALL PRODUCTION IMPROVES ---WHY DONT WE MOVE TO POINT D? UNDER AUTARKY WE COULD HAVE PRODUCED IN THE INTERIOR OF THE PPF (INEFFICIENTLY) BUT DID NOT CHOOSE TO DO SO– SO THE MOVE IS FROM A TO X

12 NOW LETS LOOK AT THE GAINS FROM THE IMPORT VIEWPOINT USING THE IDEAS OF CONSUMER AND PRODUCER SURPLUS EQUILIBRIUM PRICE IS P A DERIVED BY THE INTERSECTION OF SUPPLY OF GRAPES, S G, AND DEMAND FOR GRAPES, D G --- BUT THIS PRICE IS HIGHER THAN THE WORLD PRICE, P W, AS DETERMINED BY THE LOW COST PRODUCER IN THE WORLD --- OPENING UP TO TRADE REDUCES PRICE TO THE WORLD PRICE, P W --- CONSUMERS GAIN THE AREAS, a + b + c IN CONSUMER SURPLUS, WHILE PRODUCERS TRANSFER PRODUCER SURPLUS OF AREA a TO CONSUMERS AT THE LOWER WORLD PRICE, DOMESTIC PRODUCERS ONLY HAVE INCENTIVE TO PRODUCE AT Q 1, BUT DOMESTIC CONSUMERS DEMAND Q SO IMPORTS ARE USED TO MAKE UP THE DIFFERENCE --- THERE IS OVERALL GAIN b + c, BUT DOMESTIC PRODUCERS LOSE PRODUCER SURPLUS

13 NOW LOOK AT THE GAINS FROM TRADE FROM THE VIEWPOINT OF EXPORTS THE EXPORTER HAS LOWER COSTS OF PRODUCTION, SO THE EQUILIBRIUM OF SUPPLY OF HONEY, S H, AND THE DEMAND FOR HONEY, D H, IS AT A LOWER PRICE LEVEL, P A, THAN WORLD PRICE, P W ---- OPENING UP TRADE BRINGS THE WORLD PRICE INTO THE PICTURE--- SO PRODUCERS CAN NOW EXPORT HONEY AT THE WORLD PRICE, P W > DOMESTIC PRICE, P A ---- THE RESULT IS THAT PRODUCERS GAIN THE AREAS e + f + g ---- CONSUMERS LOSE CONSUMER SURPLUS OF e + f AND TRANSFER THAT GAIN TO DOMESTIC PRODUCERS DOMESTIC DEMAND IS REDUCED, BECAUSE PRICES ARE HIGHER, TO Q 3 WHILE SUPPLY IS INCREASED TO Q 4 AS PRODUCERS RESPOND TO THE HIGHER PRICES FOR HONEY--- SO THE EXPORTS AMOUNT TO Q 4 – Q 3 THE NET GAIN IS AREA g, BUT CONSUMERS LOSE WHILE THERE IS OVERALL GAIN

14

15 NOW LETS IMPOSE A TARIFF { ASSUMING SMALL COUNTRY IMPLICATIONS} UNDER FREE TRADE AT THE WORLD PRICE, P W, IN THE GRAPH BELOW (FIGURE 6.6 OF HUSTED-MELVIN), DOMESTIC PRODUCTION IS Q 1, WHILE DOMESTIC DEMAND IS Q WITH THE TARIFF, WHICH IMPOSES A PRICE OF P W + t, OR THE WORLD PRICE + A TARIFF OF t, CONSUMERS LOSE CONSUMER SURPLUS IN THE AMOUNT a + b + c + d, AND TRANSFER CONSUMER SURPLUS a TO DOMESTIC PRODUCERS (GAIN IN PRODUCER SURPLUS)--- THE AREAS b AND c ARE DEADWEIGHT LOSS OF THE TARIFF AND ARE LOST TO THIS ECONOMY---IT GOES TO NO ONE!--- AREA b IS THE PRODUCTION EFFECT DEADWEIGHT LOSS, WHILE AREA d IS THE CONSUMPTIVE EFFECT OR CONSUMER DEADWEIGHT LOSS --- AREA c IS TRANSFERRED FROM CONSUMER SURPLUS AND IS CAPTURED BY THE GOVERNMENT WHO COLLECTS THE TARIFF REVENUE --- THE NET WELFARE CHANGE IS THE LOSS OF AREA b AND d DOMESTIC PRODUCERS NOW PRODUCE Q 3 EVEN THOUGH THEY ARE HIGHER COST PRODUCERS, AND DEMAND IS REDUCED FROM Q 2 TO Q 4, AND REDUCES IMPORTS TO Q 4 – Q 3

16 THE DEADWEIGHT LOSSES CAN BE BROKEN DOWN AND DEFINED A BIT MORE IN DETAIL THE AREA, a IN THE LAST GRAPH CAN BE DIVIDED INTO AREA a 1 AND a a 2 IS THE PRODUCER SURPLUS ON THE EXPANDED OUTPUT NOW UNDER THE TARIFF CONDITIONS THAT DOMESTIC PRODUCERS GAIN---THE COST OF THE INPUTS USED TO MAKE THAT EXPANSION IN PRODUCTION IS b + e --- BUT WITHOUT THE TARIFF, THOSE UNITS OF INPUTS COULD HAVE BEEN PURCHASED IN THE WORLD MARKET FOR e ---- SO AREA b IS THE COST OF INPUTS DEVOTED TO EXPANDING DOMESTIC PRODUCTION IN THE HIGHER-COST DOMESTIC INDUSTRY RATHER THAN HAVING THOSE UNITS PROVIDED BY LOWER-COST FOREIGN PRODUCERS AREA d, AS INDICATED BEFORE IS THE CONSUMER DEADWEIGHT LOSS OF THE TARIFF– IT IS THE VALUE OF LOST CONSUMER SATISFACTION DUE TO SHIFT IN CONSUMPTION TO LESS DESIRED SUBSTITUTES BROUGHT ON BY THE HIGHER PRICE, OR TAX--- BEFORE THE TAX, CONSUMERS PURCHASED Q 2 UNITS--- AFTER THE TAX, CONSUMPTION FALLS TO Q CONSUMERS LOSE a + b + c BECAUSE THE AMOUNT THEY NOW BUY COSTS THEM MORE

17 NOW LOOK AT THE LARGE COUNTRY IMPLICATIONS A NATION, LIKE COUNTRY A, BELOW IN THE LEFT-HAND PANEL OF THE GRAPH, MAY BE SUCH A LARGE IMPORTER THAT IT HAS INFLUENCE ON THE PRICE IN THE WORLD MARKET--- SO THAT NATIONS PURCHASES INFLUENCE PRICE ---- AT THE FREE TRADE PRICE, P FT, COUNTRY A IMPORTS Q 2 - Q 1 AND COUNTRY B EXPORTS Q 2 – Q CONSUMERS IN COUNTRY A GAIN FROM TRADE BECAUSE OTHERWISE, EQUILIBRIUM PRICE WOULD BE P A --- PRODUCERS IN COUNTRY B GAIN FROM EXPORTING BECAUSE OTHERWISE PRICE RECEIVED WOULD BE AT P B --- NOTICE THAT WE ARE LOOKING AT THE MARKET FOR A SINGLE GOOD, Q L, SO THE GAINS OF CONSUMERS ARE MEASURED AS GAINS IN CONSUMER SURPLUS AND THE GAINS TO PRODUCERS ARE MEASURED AS THE GAINS IN PRODUCER SURPLUS

18 NOW SUPPOSE COUNTRY A IMPOSES A TARIFF AT PRICE, P FT, COUNTRY AS DESIRED IMPORTS ARE GIVEN BY Q 2 – Q COUNTRY BS DESIRED EXPORTS ARE GIVEN BY Q 2 – Q AT P FT IS THE ONLY FREE TRADE EQUILIBRIUM PRICE --- IF PRICES GO ABOVE P FT, THEN DEMAND FOR IMPORTS IN COUNTRY A WILL FALL--- AND SUPPLY OF EXPORTS FROM B WILL RISE --- SO AT PRICES ABOVE P FT THERE WILL BE BE AN EXCESS SUPPLY OF Q L IN WORLD MARKETS AND THIS WILL TEND TO FORCE PRICES DOWNWARD--- ANY PRICE BELOW P FT WILL CAUSE AN EXCESS DEMAND FOR Q L IN WORLD MARKETS AND THE MARKET PRICE WILL TEND TO RISE --- A CHANGE IN COUNTRY AS DEMAND FOR IMPORTED Q L WILL EFFECT WORLD PRICE--- HENCE, THE MARKET POWER OF COUNTRY A--- A TARIFF IMPOSED BY COUNTRY A REDUCES IMPORTS TO Q 4 – Q 3 IN THAT NATION AND REDUCES EXPORTS FROM COUNTRY B TO Q 4 – Q WE GET AN INCREASE IN PRICE IN COUNTRY A FROM P FT TO P --- BUT WE HAVE ALSO CUT OFF EXPORTS IN COUNTRY B, AND SO DEMAND FOR Q L IN COUNTRY B FALLS OFF AND PRICE IS REDUCED TO P FROM P FT WITH THE HIGHER PRICE IN COUNTRY A, CONSUMERS LOSE a + b + c + d --- BUT PRODUCER SURPLUS RISES BY AREA a GOVERNMENT REVENUE IN COUNTRY A RISES BY AREA c + e --- THE SIZE OF THE TARIFF IS THE DIFFERENCE BETWEEN WHAT IS PAID IN A, P AND WHAT IS RECEIVED IN PRICE IN B, P, THEN MULTIPLY BY THE IMPORTS (Q 4 – Q 3 ) - -- SO PRICE HAS GONE UP IN A BUT NOT BY THE FULL AMOUNT OF THE TARIFF --- SO THE Q L COMES INTO A AT A LOWER PRICE

19 LOOK AT THIS AGAIN! ONCE THE TARIFF IS IMPOSED, THE NEW PRICE IN COUNRY A IS P ( = P + t ) SO THE AREA c + e REPRESENTS THE TARIFF PROCEEDS PAID BY COUNTRY AS CONSUMERS TO THE GOVERNMENT OF COUNTRY A--- BUT PRODUCERS PAY PART OF THIS GIVEN THAT THEY HAVE TO TAKE A LOWER PRICE BECAUSE IMPORTS ARE REDUCED IN COUNTRY A, MEANING THAT EXPORTS FROM B TO A HAVE ALSO FALLEN OFF BECAUSE OF THE TARIFF --- ECONOMIC WELFARE INCREASES IN COUNTRY A IF e > (b + d) ---- SO e IS THE AMOUNT OF TARIFF PAID BY FOREIGNERS BECAUSE THE WORLD PRICE OF THEIR EXPORTS HAS FALLEN---- THE AMOUNT (b +d) IS THE USUAL DEADWEIGHT LOSS OF THE TARIFF ---- THE SMALLER IS THIS DEADWEIGHT LOSS THE GREATER LIKELIHOOD THAT WELFARE WILL INCREASE IN COUNTRY A BY IMPOSING A TARIFF --- THIS WOULD BE CALLED AN OPTIMUM TARIFF IF THE WELFARE IS INCREASED IN COUNTRY A WELFARE IS INCREASED BY SETTING A TARIFF IN THE LARGE COUNTRY CASE (CASE OF THE LARGE IMPORTER) IF e > (b + d) SUCH A TARIFF WOULD BE CALLED AN OPTIMAL TARIFF

20 NONTARIFF BARRIERS --- LIKE QUOTAS QUOTA--- A GOVERNMENT MANDATED LIMITATION ON EITHER THE QUANTITY OR THE VALUE OF TRADE IN A PRODUCT QUOTAS THAT ENTIRELY ELIMINATE TRADE IN A CERTAIN PRODUCT ARE KNOWN AS EMBARGOES THE U.S. BANS IMPORTS FROM IRAN, IRAQ, LIBYA, CUBA (MOST PRODUCTS) AND NORTH KOREA TRQS--- TARIFF RATE QUOTAS – QUOTA POLICIES THAT ALLOW A CERTAIN QUANTITY OF A GOOD INTO A COUNTRY AT LOW (OFTEN ZERO) TARIFF RATES --- BUT THEN A SIGNIFICANTLY HIGHER TARIFF IS IMPOSED IF IMPORTS EXCEED THE QUOTA THE U.S. HAS IMPOSED TRQS ON TEXTILES, MILK, CREAM, BUTTER, MARGERINE, SUGAR, PEANUTS, COTTON CHINA IMPOSES TRQS ON GRAINS

21 THE WELFARE EFFECTS OF QUOTAS AS SHOWN IN THE GRAPH BELOW, THE IMPOSITION OF A QUOTA RAISES DOMESTIC PRICE AND LOWERS CONSUMER SURPLUS ---- CONSUMERS LOSE a + b + c + d --- THE AREA a IS TRANSFERRED TO PRODUCER SURPLUS IN THE IMPORTING NATION BECAUSE THE FOREIGN COMPETITION HAS BEEN LOWERED --- b AND d REPRESENT THE DEADWEIGHT LOSS OF THE QUOTA AREA c IS THE VALUE OF QUOTA RENTS --- THESE ARE PROFITS THAT ACRUE TO WHOMEVER HAS THE RIGHT TO BRING IN THE IMPORTS AND SELL THEM AS PROTECTED GOODS ---- IF THE GOVERNMENT MAINTAINS THOSE RIGHTS, THEY GET THE REVENUE BY SELLING QUOTA RIGHTS TO IMPORTERS OR TO EXPORTERS WHO SHIP IN THE GOODS NET WELFARE CHANGE IS A LOSS OF b + c + d, IF GOVERNMENT DOES NOT CAPTURE THE QUOTA RENTS, OR IF THEY DO, THEN THE NET LOSS IS b + d

22 THE VOLUNTARY EXPORT RESTRAINT – VER THE IMPORTING GOVERNMENT MAKES AN AGREEMENT WITH A FOREIGN GOVERNMENT TO HAVE THE FOREIGN GOVERNMENT IMPOSE VOLUNTARY RESTRICTION ON EXPORTS INTO THE IMPORTING NATION --- IN RETURN FOR RESTRICTING IMPORTS, THE EXPORTERS ARE ALLOWED TO RAISE THEIR PRICES, THUS EARNING THE QUOTA RENTS IN ADDITION TO THEIR NORMAL PROFITS ---- THE WELFARE COSTS OF THE VER IN THE IMPORTING NATION ARE THEN b + c + d BECAUSE CONSUMERS LOSE a + b + c + d, DOMESTIC PRODUCERS GET a, AND FOREIGN EXPORTERS UNDER THE RESTRAIN GET c

23 WHAT ABOUT A DOMESTIC PRODUCTION SUBSIDY VS A TARIFF? START OUT WITH SUPPLY, S --- THEN SUBSIDIZE PRODUCTION TO MOVE SUPPLY DOWN TO S ---- THEN WHEN SUPPLY INTERSECTS WORLD PRICE, P W, ALLOW FREE TRADE AT THE WORLD PRICE --- PRODUCTION INCREASES FROM Q O TO Q PRODUCERS RECEIVE a + b – TAXPAYERS PAY TAXES TO THE GOVERNMENT AND THE GOVERNMENT THEN USES THE TAX REVENUE TO OFFER THE SUBSIDY--- DOMESTIC PRODUCER PROFITS RISE BY a, AND b GOES TO HIRE RESOURCE TO PRODUCE THE NEW AMOUNT, Q SO b IS THE DEADWEIGHT COST OF GOVERNMENT POLICY FOR THE SUBSIDY --- SO CONSUMERS LOSE a + b IN THE FORM OF HIGHER TAXES WHILE PRODUCERS GAIN a IN PROFITS --- THE COST TO SOCIETY IS b BUT IF A TARIFF IS IMPOSED, THEN PRICE BECOMES P W + t (WORLD PRICE + THE TARIFF)--- PRODUCERS THEN CAN PRODUCE AT Q CONSUMERS LOSE CONSUMER SURPLUS, BUT GOVERNMENT GETS THE TARIFF REVENUES---- BUT THE LOSS TO SOCIETY IS THE DEADWEIGHT LOSS OR b + d COMPARED TO THE SUBSIDY AND THEN FREE TRADE POLICY LOSS OF b

24 WHAT SHOULD A NATION DO TO COUNTERACT A FOREIGN MONOPOLY EXPORTER? IBM EXPORTS PRODUCT INTO BRAZIL, BUT IS THE ONLY SUPPLIER OF THAT PRODUCT ( A MONOPOLY SELLER IN BRAZIL) ---- DEMAND AND MARGINAL REVENUE CONDITIONS FOR THE MONOPOLIST ARE GIVEN BY D B AND MR B, RESPECTIVELY----IBM EQUATES MARGINAL COST, MC, WITH MARGINAL REVENUE TO MAXIMIZE PROFIT (SETTING MR B = MC, SUPPLY Q* OF PRODUCT INTO BRAZIL AND DERIVING THE MONOPOLY PRICE FROM THE DEMAND CURVE OF P*--- MONOPOLY PROFIT IS THE BLUE SHADED AREA---- WHAT CAN BRAZIL DO TO COUNTERACT THIS MONOPOLY SITUATION? ---- SO LONG AS IBM DOES NOT CHARGE A PRICE HIGHER THAN P*, BRAZIL CAN IMPOSE A TARIFF, P* - C, AND ATTEMPT TO EXTRACT THE MONOPOLY PROFITS FROM IBM --- IN DOING SO, BRAZIL HAS TO STOP SHORT OF A TARIFF THAT WOULD BE GREATER THAN P* - C --- SO NOW SOME OF IMBS MONOPOLY PROFITS REMAIN IN BRAZIL AS GOVERNMENT REVENUES --- NO DEADWEIGHT LOSSES ARE IMPOSED ON BRAZIL OR THE COUNTRY IN WHICH IBM IS HEADQUARTERED BECAUSE NEITHER PRICES NOR TRADE LEVELS ARE AFFECTED--- BRAZIL RECAPTURES PROFITS MC = MARGINAL COST MC = MR MONOPOLY PROFITS

25 TRY A PROBLEM!! DOMESTIC DEMAND AND SUPPLY ARE GIVEN, RESPECTIVELY BY Q = 100 – P (DEMAND) AND Q = P (SUPPLY) --- Q = QUANTITY, AND P = PRICE IF WORLD PRICE IS 10, WHAT IS THE FREE TRADE LEVEL OF IMPORTS? SO, FOR DEMAND Q = 100 –(10) = 90, AND FOR SUPPLY Q = (10) = 70, SO IMPORTS ARE DEMAND MINUS SUPPLY WHICH IS 90 – 70 = 20 SUPPOSE THAT THE COUNTRY IMPOSES A QUOTA OF 11 UNITS. HOW MUCH WILL THE DOMESTIC PRICE RISE? WELL, DEMAND MINUS SUPPLY IS NOW 11, OR (100 – P) – (50 + 2P) = 11, OR 100 –50 –3P = 11, OR 3P = 100 – 50 – 11, OR 3P = 39, OR P = 39/3 = SO PRICE IS NOW 13, RISING FROM 10 TO 13 WHAT ARE THE WELFARE EFFECTS? CONSUMERS LOSE CONSUMER SURPLUS--- PRODUCERS GAIN PRODUCER SURPLUS, AND THE NET WELFARE OF THE SOCIIETY IS A LOSS OF PROTECTION DEADWEIGHT LOSS + CONSUMPTION DEADWEIGHT LOSS AND POSSIBLY QUOTA RENTS DEPENDING ON WHO CAPTURES THE QUOTA RENTS IF THE COUNTRY NEGOTIATES A VER, THE THE LOSS TO SOCIETY IS THE SUM OF THE DEADWEIGHT LOSSES PLUS THE QUOTA RENTS


Download ppt "TARIFFS & QUOTAS. TARIFFS ---- MAINLY IMPOSED AS INDUSTRY PROTECTION SOME REVENUE GENERATING PURPOSES AS WELL IMPORT TARIFFTARIFF ON IMPORTED ITEMS ---"

Similar presentations


Ads by Google