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CHAPTER VII: Tariffs and Quotas

CHAPTER VII: Tariffs and Quotas. Lectured by: SOK Chanrithy. I. Introduction. Protective trade policy Help domestice producers from int competitions Government revenue Definition Look closely to the direct effect of relatively simple tariff and quotas.

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CHAPTER VII: Tariffs and Quotas

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  1. CHAPTER VII: Tariffs and Quotas Lectured by: SOK Chanrithy

  2. I. Introduction • Protective trade policy • Help domestice producers from int competitions • Government revenue • Definition • Look closely to the direct effect of relatively simple tariff and quotas. • Review of fixed and Valorem tariffs by small and large country • Tariff and Quotas are similar market consequences • Simple analystics of eco welfare changed • Maximum revenue tariff

  3. I. Introduction • Help domestic producers from international competitions • Government revenue • Look closely to the direct effect of relatively simple tariff and quotas. • Review of fixed and Valorem tariffs by small and large country • Tariff and Quotas are similar market consequences • Simple analytics of eco welfare changed

  4. II. Tariff • Small Nation Fixed tariff “fixed rate” • Example: 20c per pound of tobacco • 1st small nation put import tariff => not effect to international price • Show Graph

  5. Small Country Importer p p S p1 ES (R) imports D ED qm q qs qd 0 Domestic Market International Market

  6. Ad valorem tariff: percentage of the international price rather than a fixed price unit amount. • Explain graph

  7. Small Country Importer p p S p1 ES (R) imports D ED qm q qs qd 0 Domestic Market International Market

  8. Small Country Importer with Tariff t, page1 p p S p2 t p1 p1 ES (R) imports D ED qm q qs qd 0 Domestic Market International Market

  9. Small Country Importer with Tariff t, page 2 p p S The tariff raises the price in the importing country to p2 = p1 + t. This means that domestic suppliers will increase quantity supplied and consumers will reduce quantity demanded. Excess demand declines. t = p2 – p1 c d p2 t p1 p1 ES (R) b a t D ED ED* qd* qm* qs* qs qd qm q 0 Domestic Market International Market ED* --excess demand as the ROW sees it

  10. Welfare effects of Small Country Importer with Tariff t p S t = p2 – p1 c d p2 C A t D B p1 b a D qd* qs* qs qd q Domestic Market

  11. Effect of a Tariff, Large Country Case—page 1 The large country case is different because the tariff cannot be simply added to the import price. Any change in Excess Demand will cause a change in world prices. Country B (Importer) International Market Country A (Exporter) ESA SA SB d a c e b f p1 t DA DB EDB qsa qda qt qsb qdb The tariff acts as a wedge between EDB and ESA.

  12. Effect of a Tariff, Large Country Case—page 2 Country B (Importer) International Market Country A (Exporter) ESA SA SB t a e b f p1 DA DB EDB qsa qda qt qsb qdb

  13. Effect of a Tariff, Large Country Case—page 3 Country B (Importer) International Market Country A (Exporter) ESA SA SB t p1 DA DB EDB EDB qsa qda qt qsb qdb

  14. Effect of a Tariff, Large Country Case—page 4 Country A (Exporter) International Market Country B (Importer) ESA SA SB t p1 DA DB EDB qsa qda qt qsb qdb Tariff revenues

  15. Large Country Tariff Welfare Effects We will look at the welfare effects of a tariff on large country traders in two sections—one for the importer and one for the exporter. I have flattened out the curves a little to make the welfare components easier to identify.

  16. Welfare Effects of Tariff, Importer Side, Large Country Case Country B (Importer) International Market SB ESA A C D B p2 p1 p1 t t p3 p3 E *C+E are tariff revenues EDB ED*B DB qdb qsb q*t qt The importer tariff of t drives up prices in the importer country from free trade price of p1 to price p2. It also drives down the world price to p3. Importer welfare effects reflect changes from free trade prices and quantities (black) to tariff-restricted prices and quantities (red).

  17. Welfare Effects of Tariff, Exporter Side, Large Country Case Country A (Exporter) International Market ESA SA U W p2 p1 t V T p3 p3 EDB ED*B Tariff revenues DA qsa qda q*t qt The tariff (it could also be a quota or other trade restriction) by the importer drives down the world price from free trade price p1 to price p3. Exporter welfare effects reflect the changes from the original free trade world market prices and quantities (black) to tariff-restricted world prices and quantities (red).

  18. III.Quotas • A binding quotas: the amount that below the world quantities occur. • If the quota is larger than free trade it has no real effect. • Price in domestic will rise and producer will extend output. • Small Country Case • Large country Case

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