Week 8: Import Tariff and Quotas under Perfect Competition

Question 1

Trade policy

Answer 1

• Government action meant to influence the amount of international trade

Question 2

Tarrif

Answer 2

Tax imposed on imports

Question 3

Quota

Answer 3

A quota is a limit on import amounts

Question 4

Gains from trade - welfare & No trade

Answer 4

• welfare in this equilibrium is = to the sum of producer and consumer surplus at the the equilibrium price PA

Question 5

welfare impact under trade (small country)

Answer 5

• small country is a “price taker” if it is open to trade
• Rise in CS: + (b + d)
• fall in PS: -b
• net welfare effect + d
• area d: the measure of the gaind from trade. home imports M1 = D1 - S1

Question 6

price taker

Answer 6

• a firm or individual that accepts the market price without influencing it.

Question 7

Deriving import comand curve

Answer 7

• for any given price where P < PA, the import demand curve M yields D - S, the difference of the demand and supply prevalent at that price

Question 8

Small country

Answer 8

• Small country is a price taker thus it cannot impact the world price
• therefore it’s export supply curve is perfectly elastic
• perfectly elastic means it’s horizontal

Question 9

home price under Tarifs (small country)

Answer 9

• The defacto price at home is PW + t
• t = import tax on each unit of imports

Question 10

import tariffs for a small country (imports)

Answer 10

• imports will decrease (as more expensive for consumers)

Question 11

Import tariffs for a small county (welfare)

Answer 11

• fall in CS: -(a + b+ c + d)
• rise in PS: + a
• rise in GR (government revenue): +c
  net welfare effect: - (b+d)
• areas b and d are respectively call the production loss and the consumption loss

Question 12

Import tariffs for a small county (welfare - import tariff)

Answer 12

• increase in government revenue C
• deadweight loss of b + d
• imports reduce from M1 to M2

Question 13

Deadweight loss defined

Answer 13

• (b)Production cost: the increase in marginal costs for the extra units produced due to producing at marginal cost above the world price
• (d) consumption cost: drop in consumer surplus for those individuals who are no longer able to consumer units between d1 and d2 because of the higher price

Question 14

dead weight loss (formulas)

Answer 14

Question 15

Large country

Answer 15

• can affect the world price (pw) with it’s policies
• foreign supply X* is no longer perfectly elastic

Question 16

Import tarrifs for Large country (foreign export supply curve x*

Answer 16

• for any iven price P > P A, the foriegn export supply curve X yields S* - D*, the difference of the supply and demand prevalent at that price.
• Pw is when M = X* in other words equilibrium obtains when market is clear