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1、The Impact of Trade PoliciesCHAPTER 14:Copyright 2014 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinLearning ObjectivesIllustrate how tariffs, quotas, and subsidies affect domestic markets.Identify the winners, losers, and net country welfare effects of protection.Explain h

2、ow the effects of protection differ between large and small countries.Demonstrate how protection in one market can affect other markets in the economy.Consumer SurplusConsumer surplus (CS) is a measure of the overall well-being of consumers.CS is the area between the demand curve and the price.CS va

3、ries inversely with the price.Consumer SurplusDQPP*Producer SurplusProducer surplus (PS) is a measure of the well-being of producers.PS is the area between the supply curve and the price.PS varies directly with price.Producer SurplusSQP P*Trade Restrictions in Partial Equilibrium: The Small Country

4、CaseWhat happens when a country imposes a tariff? Its domestic price rises.Therefore, tariffs: benefit domestic producers.harm domestic consumers.generate tariff revenue for the government.Tariffs: Small Country CaseDQPS$1$1.351000200012501750cdbaCS falls by area a+b+c+d, or $656.25.PS rises by area

5、 a, or $393.75.Revenue rises by area c, or $175.Deadweight loss is areas b+d, or $87.50.14-8Tariffs: Small Country CaseA tariff makes producers better off, but overall, the small countrys welfare falls.Import Quotas: Small Country CaseRecall that quotas and tariffs can be designed to be equivalent.T

6、he difference is that with quotas there is no revenue collected.Instead rent will be captured byholders of import licenses or the government if it auctions the licenses, orforeign suppliers, if they organize.The welfare implications of the quota are otherwise the same as for tariffs.0Production Subs

7、idies: Small Country CaseDQPS$5$6100190120160cbaA $1 subsidy has the effect of shifting the supply curve to the right.CS doesnt change, because consumers still pay $5. PS rises by areas a+b .The cost of the subsidy is a+b+cDeadweight loss is areas c.S14-11Production Subsidies: Small Country CaseProd

8、uction subsidies lead to deadweight loss because of the expansion of relatively inefficient production.However, the DWL is less than would have occurred if an equivalent tariff or quota were used.0Export Taxes: Small Country CaseExport taxes cause the price in the imposing (i.e., exporting) country

9、to fall, since some of what had been exported is not anymore.Wed predict an increase in CS, a decrease in PS, and a gain in revenue.0Export Taxes: Small Country CasePQSDPFTPETCS rises by area a.PS falls by areas a+b+c+d.Revenue rises by area c.DWL is b+d.0adcbAn export tax tariff makes consumers bet

10、ter off, but overall, the small countrys welfare falls.Export Taxes: Small Country CaseExport Subsidies: Small Country CaseExport subsidies cause the price in the imposing (i.e., exporting) country to rise, since more of what is produced is now exported.Wed predict an decrease in CS, an increase in

11、PS.The subsidy will generate cost, not revenue.0Export Subsidies: Small Country CasePQSDPESPFTCS falls by area a+b.PS rises by areas a+b+c+d+e.Subsidy cost is b+c+d+e+f.Overall effect is a loss: b+f.0adcbefExport Subsidies: Small Country CaseAn export subsidy tariff makes producers better off, but o

12、verall, the small countrys welfare falls.Voluntary Export Restraints: Small Country CaseSimilar to tariffs or quotas, VERs raise the domestic price whichlowers CSraises PSRent, however, is captured by the exporting country.The imposing country will lose not only the DWL triangles, but also the rent

13、rectangle; welfare falls.0Tariffs: Large Country CaseIn the previous analysis, the tariff caused the imposing countrys price to rise by the full amount of the tariff.This would mean that the imposing country is “small”; if it imposes a tariff, it is unable to affect the world price.What if a country

14、 is not “small”?0Tariffs: Large Country Case0PQPQSDSDImporting CountryExporting CountryPFTabdceThe tariff causes price to rise in the importing country; P falls in the exporting country.14-21Tariffs: Large Country CaseImporting Country0PQPQSDSDExporting CountryPFTabdceImporting country CS falls by a

15、+b+c+d.PS rises by area a.Revenue increases by areas c+e.Overall effect: e(b+d).14-22Tariffs: Large Country CaseA large country could increase its welfare by imposing a tariff if the revenue extracted from the exporting country (area e) is bigger than the deadweight loss (areas b+d).This assumes tha

16、t the exporting country does not retaliate.0Import Quotas: Large Country CaseAs with the tariff, IQs cause prices in the importing country to rise, and prices in the exporting country to fall.As with the tariff, if enough of the quota rent is transferred from the exporting country to offset the dead

17、weight loss, a quota can increase a countrys overall welfare.This also assumes no retaliation.0VERs: Large Country CaseAs with the tariff and the quota, VERs cause prices in the importing country to rise, and prices in the exporting country to fall.However, unlike quotas rent generated is captured b

18、y the exporting country.VERs are welfare-diminishing even in the large country case.0Export Taxes: Large Country CaseIn the previous analysis, the export tax caused the imposing countrys price to fall by the full amount of the tax.If the exporting country is large, its price will fall somewhat but t

19、he price in the importing country will also rise.0Export Taxes: Large Country CaseSImporting CountryThe export tax causes the price to fall in the exporting country and rise in the importing country.0PQPQDSDExporting CountryPFTabdce14-27Export Taxes: Large Country CaseImporting CountryExporting Coun

20、try0PQPQSDSDPFTCS rises by area a.PS falls by areas a+b+c+d.Revenue rises by areas c+e.abdce14-28Export Taxes: Large Country CaseA large country could increase its welfare by imposing an export tax if the revenue extracted from the importing country (area e) is bigger than the deadweight loss (areas

21、 b+d).This assumes that the importing country does not retaliate.0Export Subsidies: Large Country CaseCS falls.PS rises.But there is no revenue; instead cost.Overall, export subsidies are welfare-diminishing for small countries and for large countries.0Trade Restrictions in General Equilibrium: The

22、Small Country CaseWe can use general equilibrium analysis to better understand the economy-wide effects of protection.A tariff on imports of good Y will stimulate domestic production.The economy winds up on a lower indifference curve.Tariffs in General Equilibrium: Small Country CaseYXB0C0B1(Px/Py)0C1Px/Py(1+t)In free trade, producer equilibrium is at B0, and consumer equilibrium is at C0. The tariff changes production to point B1;consumption moves to C1 (on a lower ind