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Chapter 8

Chapter 8. Supplementary Notes. Consumer Surplus. Producer Surplus. Exercises. Consumer surplus and producer surplus in autarky Changes in CS and PS In the case of a importer In the case of an exporter Importing is a losing business?. Costs and Benefits of Tariffs.

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Chapter 8

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  1. Chapter 8 Supplementary Notes

  2. Consumer Surplus

  3. Producer Surplus

  4. Exercises • Consumer surplus and producer surplus in autarky • Changes in CS and PS • In the case of a importer • In the case of an exporter • Importing is a losing business?

  5. Costs and Benefits of Tariffs

  6. Costs and Benefits of Tariffs

  7. The Effects of a Tariff in a Small Country

  8. Nontariff Barriers • Quotas • Export subsidies • Government procurement policies • Health and safety standards • Domestic contents requirement • Anti-dumping and countervailing duties

  9. Quotas • Government-imposed limits on the quantity or value of imports or exports • Quotas are usually allocated on the basis of licenses. • Include voluntary export restraints (VER).

  10. Equivalence of tariffs and quotas Equivalence: • Changes in domestic price, consumption, production, imports, CS and PS are all identical. • If licenses are sold, they generate revenue equal to the tariff revenue. Nonequivalence: • The quantity restriction through quotas provides the domestic producer a monopoly power. • Quotas generate quota rents (area c) and rent-seeking activity.

  11. Export Subsidies • An export subsidy is a direct or indirect payment from a country’s government to its export industries. • Various forms of export subsidies • tax rebates • subsidized loans • insurance guarantees • government funding of research and development • direct grants, etc. • Should be distinguished from production subsidies. • Export subsidies are outlawed by the GATT

  12. Effects of an export subsidy • Producers receive more for their products when exported. They divert from the home market to foreign market. Domestic price rises. • Domestic production increases. • Domestic consumption declines. • Exports increase. • If the country is large, the international price may fall. • Consumers lose, producers (exporters) gain, government loses. The country as a whole loses for sure. A large country loses more. • Meanwhile, foreign consumers (or importers) gain.

  13. Export Subsidy

  14. Export Subsidy in Europe

  15. Export subsidy in a small country

  16. Nominal and Effective Rates of Protection

  17. Example Free trade: P of a suit (output) = $150 P of textiles (imported input) = $100 VA = $50 • Tariff on imported suits: 20% or $30 per unit NRP on suits = 0.20 VA' = 180 - 100 = 80 ERP on suits = (80 - 50) / 50 = 0.60 • Tariff on imported textiles: 10% NRP on suits = 0.0 VA' = 150 - 110 = 40 ERP on suits = (40 - 50) / 50 = - 0.20 (Negative protection!) Protection of inputs is a negative protection on outputs.

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