1. Tutorial on Partial Equilibrium Modeling: Export Tax by a Large Country Exporter
The Microeconomics of International Trade
ECN 230
Roberto J. Garcia
School of Economics and Business, UMB

2. Economic effects of a specific export tax
Specific tax on exports
A per unit tax on exports (e.g., 30kr/kg) such that the difference between the domestic price and the world price is equal to 0, i.e., (PW)1 - (PD)1 = 0.
A tax has implications for prices, which affects economic behavior and welfare. The economic effects are studied by analyzing the change in prices on:
Production, consumption and trade patterns, and
Producer and consumer welfare and the government's budgetary position (i.e., expenditures and revenue).

3. Economic effects of a specific export tax
Market analysis
Analyzing the production, consumption and trade effects: the perspective of the exporting country
World market
Exporter's domestic market  τ0 
  

4. Economic effects of a specific export tax
Economic intuition and expectations
Regardless of the reason a tax is applied, the result is a reduction in the quantity exported. (Graphically, ES shifts to the left by the per unit tax rate.) It is assumed that the import-country's government does not take any policy action to counter the export tax.
The world price increases (PW) because a large seller on the international market reduces export supply, i.e., a TOT effect.
The internal price in the exporter's market decreases (PD) because there is more of the good in the domestic market.
Producers and consumers react to the change in the domestic price, from PW to [PD]1.
Producers respond to price decrease by decreasing output, QS.
In partial equilibrium analysis, a price decrease is expected to result in an increase in consumption, QD.
Government collects tax revenue which is equal to the tax rate, τ0, times the quantity exported, [QD ]1 - [QS]1.

5. Economic effects of a specific export tax
Welfare analysis
Analyzing economic costs and income transfers among producers, consumers, traders and the government: the exporting country's perspective
Exporter's market
Welfare analysis
Δ CS
Δ PS
Δ G
Δ NSW
+ (1)  τ0 
- ( )
+ (3+5)
- (2+4) + (3)

6. Economic effects of a specific export tax
Economic interpretation of welfare areas
Area '1' represents the value gained by consumers that is lost by producers, i.e., it is an income transfer from the consumer to the producer.
Area '2' represents a part of the total value lost by the producers that is not transferred to any other economic agent in the economy; it is a "dead-weight loss" (DWL) in consumption.
The DWL in consumption is the cost to society of consuming more the good in which the country has a comparative disadvantage.
The increased production reflects a misallocation of resources because because prices have been distorted.
Area '3' represents the value lost by producers is gained by government; it is an income transfer making up part of the tax on the exportable good.

7. Economic effects of a specific tariff
Area '4' represents part of the value lost by producers that is not transferred to any other economic agent; it is a "dead-weight loss" (DWL) in production.
The DWL in production is the cost to society of producing less of the exportable good, discouraging specialization in the good in which the country has a comparative advantage.
The decreased production reflects a misallocation of resources in production as a result of distorted prices.
Area '5' represents revenue that is collected by the government, along with area '3', from the tax; the total revenue is (3+5) which is equal to {[PW]1 – [PD]1} · [QX]1; however, area '5' is an income transfer from the importer to the government resulting from the TOT effect of the tax (i.e., the policy-induced reduction in supply by a large international seller that raised PW).
The net effect of the tax on exporting country is uncertain because the negative DWLs can be offset by the income transfer from the importing country.

8. Economic effects of a specific export tax
Market analysis
Analyzing the production, consumption and trade effects: the perspective of the importing country
Importer's domestic market
World market
[PW]1
[PW]1
[QS]1 [QD]1
[QM]1
  

9. Economic effects of a specific export tax
Economic intuition and expectations
Regardless of the reason a tax is applied, the result is a reduction in the quantity supplied. (Graphically, ES shifts to the left by the per unit rate of tax.) It is assumed that the import-country government does not take any policy action to counter the tax.
The world price increases (PW) because a large seller on the international market reduces export supply.
The internal price in the importer’s market is the new world price because no policy action has been taken.
Producers and consumers react to the change in the domestic price, from PW to [PW]1.
Producers respond to price increases by increasing output, QS.
In partial equilibrium analysis, a price increase is expected to result in a decrease in consumption, QD.
Because the import-country's government took no action, there are no budgetary outlays on or revenues collected from the imported good.

10. Economic effects of a specific export tax
Welfare analysis
Analyzing economic costs and income transfers among producers, consumers, traders and the government: the importing country's perspective
Importer's market
Welfare analysis
Δ CS
Δ PS
Δ G
Δ NSW
- (a+b+c+d)
+ (a)
- (b+c+d)

11. Economic effects of a specific export tax
Economic interpretation of welfare areas
Area 'a' represents the value lost by by consumers from the higher price and that is gained by producers; it is an income transfer from consumers to producers.
Area 'b' represents a part of the total value lost by the consumer that is not transferred to any other economic agent in the economy; it is a "dead-weight loss" production.
The DWL in production in the exporting country is the cost to society of producing too little of the exportable good, the good in which the country has a comparative advantage.
The decreased production reflects a misallocation of resources away from the export sector, stifling the specialization process. Area 'c' represents the value lost by consumers that is gained by the exporting-country's government; it is an income transfer from the tax on consumers in the importing country to the exporting-country's government; the transfer is a result of the TOT effect.

12. Economic effects of a specific export tax
Area 'c' represents a part of the value lost by the consumers that is gained by the exporting-country's government; it is an international income transfer that is a result of the TOT effect of the tax.
Area 'd' represents a part of the value lost by the consumers that is not transferred to any other economic agent in the economy; it is the "dead-weight loss" (DWL) in consumption.
The DWL in consumption is the cost to society of consuming too much of the importable good because the world price has been distorted.
The increased expenditures on imports reflects a misallocation of resources (i.e., a sub-optimal consumption mix).
The net effect of the tax on the importing country is negative, resulting in the DWLs and an income transfer to the exporting country.

13. Economic effects of a specific export tax
Net world welfare effects
Internal domestic transfers, DWLs and international transfers
Δ NSW
Importer
Exporter
World
- (b+d) - (c)
Importer's market
Exporter's market
- (2+4) + (5)
(e) = (5)
- (b+d) - (2+4)

14. Economic effects of a specific export tax
Concluding comments
The export tax by a large country results in a TOT effect that affects importers and exporters differently:
1. An increase in the world price benefits the exporting country(ies) at the expense of the importing country(ies).
2. The lower domestic price in the exporting country is a subsidy to domestic consumers/users which is paid by domestic producers.
3. The higher world price is a tax on import-country consumers, but benefits producers in the import-competing sector.
4. Part of the revenue collected by the exporting-country's government is an international income transfer from consumers in the importing country, i.e, a tax by the exporter on the importer.
5. The net effect of the tax on the world economy is an international income transfer and a series of DWLs in both the importing and exporting country because prices have been distorted.