Tariffs, Quotas, Subsidies And their affects on trade

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

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

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

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

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