10 Fig. 1: Deriving Home’s Import Demand Curve At P1: D = D1 and Q = S1 so MD = D1 - S1. At P2: D = D2 and Q = S2 so MD = D2 - S2MD has a negative slope: as ↑P home’s producers ↑Q and consumers ↓D → ↓MD.At PA: home’s S = D in autarky, so MD = 0.
11 Fig. 2: Deriving Foreign’s Export Supply Curve At P1: Q = S*1 and D = D*1 so XS = S*1 – D*1. At P2: Q = S*2 and D = D*2 so XS = S*2 - D*2. XS has a positive slope.At P*A: S* = D* in autarky, so XS = 0.
12 Fig. 3: World Equilibrium World equilibrium occurs when X*S = MD at price of PW where the 2 curves intersect.MD = X*SD – S = S* - D*D + D* = S + S*World D = World S
15 Fig. 4: Effects of a Tariff Price at home rises to PT and price abroad falls to P*T. Difference between PT and P*T is the amount of the specific tariff (t).At home, ↑Q and ↓D → ↓DM. Abroad: ↓Q and ↑D → ↓X*S. Thus, the volume of wheat traded falls from QW to QT. Note that MD still equals X*S with the tariff.
19 Fig. 5: A Tariff in a Small Country Here X*S is infinitely elastic. So the small country is a price taker on world markets. It can purchase as much or as little as it likes and not impact the price on world markets.PT =
26 Fig. 6: Geometry of Consumer Surplus If P = P1 then QD = Q1 and CS = area a.CS = TU – TE; where TU = area under the D curve and TE = P x Q.If price falls to P2, then QD = Q2 and gain in CS = area b. Total CS = a + b at P = P2.
28 Fig. 7: Geometry of Producer Surplus If P = P1, then QS = Q1. TR = P1 x Q1 and TC = area under the S curve. So PS = area c.If price rises to P2, then QS = Q2 and gain in PS = area d. Total PS = c + d at P = P2.
30 Fig. 8: Costs and Benefits of a Tariff in a Large Country PT = price at home with tariffPW = price in world before tariffP*T = price in foreign with tariffNet ∆welfare = area e – (b + d)Area e = tot gainArea b = over-production efficiency lossArea d = under-consumption efficiency losstariff
40 Fig. 11: Effects of an Export Subsidy in a Large Country Price at home rises from PW to PS and price abroad falls from PW to P*S.Net ∆welfare = - ( e + f + d + g + b)Area (e + f + g) = tot lossArea d = over-production efficiency lossArea b = under-consumption efficiency loss.D2D1S1S2
42 Fig. 12: Effects of an Export Subsidy in a Small Country Price in the home country rises by the full amount of the subsidy.Welfare effects:∆CS = - (a + b)∆PS = + (a + b + c)∆G rev = - (b + c + d)Net ∆welfare = - (b + d)There is no tot loss –only the efficiency losses from distorting consumer and producer decisions.PSsubsidyabcdPWDD2D1S1S2Qexports before subsidyexports after subsidy
45 Fig. 13: Europe’s Common Agricultural Policy Price support is set above the autarky and world price.The exports tend to reduce the price of agricultural goods on world markets making the subsidy more expensive!In 2005, cost of government subsidy was $60 billion.
51 Fig. 14: Effects of the U.S. Import Quota on Sugar Net ∆welfare = - (b + c + d) = $883 million/yearAreas b and d = efficiency lossesArea c = quota rents to foreignersquota= $1.674 billion= $853 million= $364 million