Fig. 1: Deriving Homes Import Demand Curve At P 1 : D = D 1 and Q = S 1 so M D = D 1 - S 1. At P 2 : D = D 2 and Q = S 2 so M D = D 2 - S 2 M D has a negative slope: as P homes producers Q and consumers D M D. At P A : homes S = D in autarky, so M D = 0.
Fig. 2: Deriving Foreigns Export Supply Curve At P 1 : Q = S* 1 and D = D* 1 so X S = S* 1 – D* 1. At P 2 : Q = S* 2 and D = D* 2 so X S = S* 2 - D* 2. X S has a positive slope. At P* A : S* = D* in autarky, so X S = 0.
Fig. 3: World Equilibrium World equilibrium occurs when X* S = M D at price of P W where the 2 curves intersect. M D = X* S D – S = S* - D* D + D* = S + S* World D = World S
Fig. 4: Effects of a Tariff Price at home rises to P T and price abroad falls to P* T. Difference between P T and P* T is the amount of the specific tariff (t). At home, Q and D D M. Abroad: Q and D X* S. Thus, the volume of wheat traded falls from Q W to Q T. Note that M D still equals X* S with the tariff.
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 =PT =
Fig. 6: Geometry of Consumer Surplus If P = P 1 then Q D = Q 1 and CS = area a. CS = TU – TE; where TU = area under the D curve and TE = P x Q. If price falls to P 2, then Q D = Q 2 and gain in CS = area b. Total CS = a + b at P = P 2.
Fig. 7: Geometry of Producer Surplus If P = P 1, then Q S = Q 1. TR = P 1 x Q 1 and TC = area under the S curve. So PS = area c. If price rises to P 2, then Q S = Q 2 and gain in PS = area d. Total PS = c + d at P = P 2.
Fig. 8: Costs and Benefits of a Tariff in a Large Country P T = price at home with tariff P W = price in world before tariff P* T = price in foreign with tariff Net welfare = area e – (b + d) Area e = tot gain Area b = over-production efficiency loss Area d = under-consumption efficiency loss tariff
Fig. 11: Effects of an Export Subsidy in a Large Country Price at home rises from P W to P S and price abroad falls from P W to P* S. Net welfare = - ( e + f + d + g + b) Area (e + f + g) = tot loss Area d = over-production efficiency loss Area b = under- consumption efficiency loss. D1D1 S1S1 D2D2 S2S2
Fig. 12: Effects of an Export Subsidy in a Small Country S D P Q PSPS PWPW a bc d subsidy S1S1 S2S2 D1D1 D2D2 exports before subsidy exports after subsidy 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.
Fig. 13: Europes 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.
Fig. 14: Effects of the U.S. Import Quota on Sugar Net welfare = - (b + c + d) = $883 million/year Areas b and d = efficiency losses Area c = quota rents to foreigners = $1.674 billion = $853 million = $364 million quota