AEM_ECON_2300_Lecture_7___Spring_2009

AEM_ECON_2300_Lecture_7___Spring_2009 - Lecture 7...

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1 of Lecture 7 Professor David Lee AEM-ECON 2300 Revenue Q T Q T ED’ ED’ A t ES ROW P Q* = 1/2 Q (for a linear ED curve) 0 0 Maximizing revenue from a tariff Q Q Q’ Q’ Q* Q* Q’’ Q’’
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2 of Lecture 7 Professor David Lee AEM-ECON 2300 Optimal tariff: A large trading country can optimize its social welfare, recognizing that it has an effect on world price. As “t” changes, g – (b + d) will change, depending on the elasticities of ED and ES
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3 of Lecture 7 Professor David Lee AEM-ECON 2300 Q’ P ROW P’ A P* ES R OW ED’ ED A Q T Q* Q T ES R OW ED’ P ROW P’ A ED A P* Q’ Q* g = tax on foreign exporters b+d = tax on domestic consumers Tariff incidence g b+d b+d g g (b+d) > < ? > g (b+d) > > < ?
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4 of Lecture 7 Professor David Lee AEM-ECON 2300 Optimal tariff: A large trading country can optimize its social welfare, recognizing that it has an effect on world price. As “t” changes, g – (b + d) will change, depending on the elasticities of ED and ES The “optimal tariff” maximizes g – (b + d); that is, it maximizes the difference between the “tax” on foreign producers (g) and that on domestic consumers (b + d)
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5 of Lecture 7 Professor David Lee AEM-ECON 2300 Q’ P ROW P’ A P* ES R OW ED’ ED A Q T Q* Q T ES R OW ED’ P ROW P’ A ED A P* Q’ Q* g = tax on foreign exporters b+d = tax on domestic consumers Tariff incidence g b+d b+d g g (b+d) > < ? > g (b+d) > > < ?
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6 of Lecture 7 Professor David Lee AEM-ECON 2300 ED’ ED A Q T ES R OW P ROW P’ A P* Q’ Q* P Q T ES R OW ED’ P ROW P’ A ED A P* Q’ Q* P g b+d b+d g g = tax on foreign exporters b+d = tax on domestic consumers Tariff incidence g (b+d) > < ?
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