1. Tariffs, Quotas, Subsidies
And their affects on
trade

2. Effects of trade in the domestic market for a good or service
The main argument for reducing barriers to trade is
the decreased price level and
resulting increased consumer surplus for households
Domestic Supply
Price
Total Supply Pd Pw
Domestic Demand
Qd1 Q
Q1 with trade
Quantity

3. Imposing a tariff on imports
The tariff is the vertical distance between the Total Supply and the Total Supply with Tariff indicated by the arrow on the graph
The imposition of a tariff causes total supply to decrease
The tariff has caused the price to increase at every level of foreign output; as the tariff is passed on to consumers, decreasing quantity demanded
Q2 is the domestic output after the tariff, an increase from Q1
An increase in domestic employment, but an increase in domestic surplus less than the total loss of consumer surplus, as well as higher price for households
Domestic Supply
Total Supply with Tariff
Price
Total Supply Pd Pt Pw
Domestic Demand Q1 Q2 Q Qt
Q1 with trade
Quantity

4. Imposing a Quota on imports
The imposition of a Quota has the same effect as a tariff, it causes total supply to decrease
The quota has arbitrarily limited the level of foreign output
Reduction in the number of sellers
Domestic Supply
Total Supply with Tariff
Price
Total Supply Pd Pt Pw
Domestic Demand Q1 Q2 Q Qt
Q1 with trade
Quantity

5. Effects of subsidy on a good or service
Nations may chose to assist domestic industries by providing subsidies to the firms
The amount of the subsidy is the distance between the Domestic Supply and the Domestic Supply with Subsidy indicated by the arrow on the graph
Domestic Supply
Price
Domestic Supply with Subsidy Pd Ps
Domestic Demand Q
Q1 with subsidy
Quantity

6. Effects of an export subsidy in the domestic market for a good or service: the price is lower and the quantity is greater
Such action by a nation is called a domestic export subsidy, because the industry can now better compete in world trade
The quantity supplied by foreign producers (quantity imported) is Q6 – Q2
Domestic Supply
Price
Domestic Supply with Subsidy
Total Supply without Subsidy Pd
Total Supply with Subsidy Ps Pw
Pw+Ps
Domestic Demand Q1 Q2 Q3 Q4 Q5
Q6 with subsidy
Quantity