7 Week (Tuesday, 9/27/2011)
Chapter 8
Analysis of Tariffs
Outline
Definition of Tariffs and Types
Positive and Normative Effects
Small vs. Large Country in World
Trade
Graphical Analysis of Tariff
Small country case
Large country case
Tariff Analysis: Broad Lessons
The Pie Shrinks
Tariffs (& other trade barriers) almost always lower
the living standard of the nation imposing the tariff.
Always a Better Way
Whatever a tariff can do for the nation, a different
policy can do better.
Someone Definitely Gains:
A tariff always helps the groups tied closely to the
product, even when hurting the nation as a whole.
What is a Tariff?
Tax on traded products
Tax on imported good; tax on exported
good
Specific (amount per unit)
ts = amount per unit ($.50 per gallon)
P + ts
Ad Valorem (percent of value)
ta = percent of value (5 % of value)
P + ta P = (1+ta) P
Importance as Revenue Source
United States
Tariff
Revenue as %
Of Total
Revenue
1789-1850
1900
1990s
2%
90-95%
50%
1-
Tariff Revenue as % Of Total
Revenue
Various countries, Circa 1994
United States
Japan
Sweden
Norway
Denmark
United Kingdom
China
India
Pakistan
20.74
23.28
Lesotho
Belize
Guinea
Dominican Republic
Gambia
51.75
47.96
47.43
43.68
42.04
1.55
1.24
.84
.51
.05
.08
25.37Why this
particular
pattern?
Effects of Import Tariff
Positive Analysis
Impact on PD, QD, QS, and M and possibly Pw
Revenue consequences for government
Normative Analysis
Impact on the well-being of consumers,
producers, and the nation as a whole
Defining Small and Large
Country in International Trade
Large Country in Trade
AUTARKY
Price
Sf
Pd
Price
Sd
Dd
Df
Q
Pf
http://en.wikipedia.org/wiki/Pupusa
A Pupusa is a
traditional
Salvadoran dish
made of thick,
hand-made tortilla
made using a
maize flour dough.
Large Country in Trade
WORLD MARKET IN
PUPUSAS
Price
Sf
Price
Sd
Pd
Dd
Df
Q
Pf
Small Country in Trade
Rest of
AUTARKY
World
Price
Price
Sd
Dd
Sf
Pd
Pf
Df
PW
Start with Small Country
Quick Review of Opening to
Trade
U.S. Small Country in Bicycle Market
Rest of
AUTARKY
World
P
P
Sd
Sf
$400
Dd
Pd
$300
Pw
Df
U.S. Bicycle Market -- Autarky
price per bike
$540
Sd
Pd=$400
210
Bikes)
Dd
Qd=Qs
Q (mill.
Open to Free Trade
U.S. Consumer Response
P
$540
Sd
Pd=$400
Pw=$300
World P
210
Net benefit from being
able to consume in a
lower price
Dd
Qd Qd
Q (mill.
Open to Free Trade
U.S. Producer Response
Price
$540
Sd
Pd=$400
Pw=$300
World P
210
Dd
Qs Qs
Q (mill.
U.S. Bicycle Market Free
Trade
Price
$540
Sd
Pd=Pw=300
P
210
World
Dd
0.6
1.6
Q (mill.
U.S. Imposes 10% Tariff on Bikes
If ta = 10%, then the following
occurs to domestic prices:
Pd rises to Pd=Pw(1+ta)
Pd = $300(1+.10)=$330
U.S. Producer Response
(ta = 10%)
Price
Sd
Pd= $330
30
Pd=Pw=$300
P
$300 +
World
Dd
0.6 0.8
Q (mill.
U.S. Consumer Response
(ta = 10%)
Price
Sd
Pd = $330
+ 30
Pd=Pw=300
P
$300
World
Dd
New Equilibrium
(ta = 10%)
Price
Sd
Pd= $330
30
Pd=Pw=300
$300 +
World P
Dd
0.6 0.8 1.4 1.6
Q (mill.
Note: M, M and (Pd-Pd)M
Price
Sd
Pd= $330
Pd=Pw=300
Pd-Pd=Pw(1+t)-Pw=tPw
M
M
Bikes)
0.6 1.4 0.8 1.6
Dd
Q (mill.
Positive Effects of Tariff
SMALL COUNTRY CASE
Raises Domestic Price: Pd to Pd
Expands Domestic Production: Qs to Qs
Decreases Quantity Consumed: Dd to Dd
Reduces imports: M to M
Raises Tariff Revenue: (Pd-Pd) M=(tPw)
M
Effects on Well-being
Price
Sd
Pd= $330
Pd=Pw=300
a
b
c
d
Dd
Bikes)
0.6 0.8 1.4 1.6
Q (mill.
Area Under Supply Curve
S
P
The dollar value
of the domestic
resources used
in X.the
value they
created
X
Q
Meaning to Society *
P
domestic
resources
S
Area is the
value society
gives up by
having
Meaning of Area To Society *
S
P
Value of
domestic
resources drawn
into industry -value lost
elsewhere
in society
X X
Q
Deadweight Losses
Triangle d consumption inefficiency
loss
Consumer surplus lost
Triangle b production efficiency loss
Value of domestic resources wasted in
production of extra units of domestic output
Normative Effects of Tariff
SMALL COUNTRY CASE
Consumers Loss Area - (a + b + c + d)
Producers Gain Area + a
Govt Revenue
Area
+c
NATIONAL LOSS
Area
-b
-d
Using Data
SMALL COUNTRY CASE
Raises Domestic Price: $300 to $330
Expands Domestic Production: 0.6 to 0.8
mill
Decreases Quantity Consumed: 1.6 to 1.4
mill
Reduces imports: 1.0 to 0.6 mill
Raises Tariff Revenue: ($330-$300) 0.6
mill
With Data From Example
Consumers Loss
- (a + b + c + d)
a=0.6($330-$300) + ($330-$300)(0.8-0.6)
b= ($330-$300)(0.8-0.6)
c= ($330-$300) 0.6
d= ($330-$300)(1.6-1.4)
Producers Gain
Govt Revenue
NATIONAL LOSS
+a
-b
+c
-d
Now turn to:
Large Country In
International Trade
Large Country in Trade
Price
S
Po
Price
S
$40
D
D
Qo
Po
Terms of Trade Gain
Additional (Positive) Effect:
Setting of tariff purchases of the
imported product
This reduces world price of product
Country benefits from paying less
on remaining imports
In a sense, forcing foreign suppliers
to pay the tariff or to hold onto sales
by lowering their price
Large Country in Trade W/ Tariff
Tariff = $10
Price
S
P
S
Price
$44
$40
D
D
Qo
P
$34
Positive Effects of Tariff
LARGE COUNTRY CASE
May Raise Domestic Price of Imported
Good
May Expand Domestic Production
May Decrease Quantity Consumed
Raises Tariff Revenue
ALSO HAS terms of trade effect
Normative Effects of Tariff
LARGE COUNTRY CASE
Consumers Loss Area - (a + b + c + d)
Producers Gain Area + a
Govt Revenue
Area
+c
+e
NATION
Area
-b
-d +
e
Summary
Small Country
Welfare
tariff
level
ta
Large Country
Welfare
ta
tariff level
Cost of Trade Barriers U.S.
Lower Bound Estimate: $32.3 bill. per
yr
P
S
a
bcd
D
Q
Additional Costs
Stifles competitive pressures
Dampens cold shower effect
S curve shifts progressively up and back
Generates Rent-Seeking Activity &
Corruption
Lobby or bribe government officials
Losses are as much as 35-40% of economic
activity
Lowers Economic Growth
Reduces innovation
10X
Given Costs Why Used?
Revenue Source
National Defense
Infant Industry
Protect Jobs
Curb Cheating By Foreigners
Response to Special Interest Pressure