Equalivant quota and tax
a.
Why doe governments limit trade?
i.
Economic motivations
1.
TOT (Terms of trade) effect
a.
A large importer can enhance total social welfare by
limiting imports with an optimal tariff.
b.
Ex. suppose
c.
D us M = 6000 – 100P
i.
P max = 60
d.
S foreign X = 200 P
(rest of the world supply
exports
i.
P min = 0
e.
Dm = 6000 – 100 ( P + T)
f.
Sx = 200 P isn’t affected bc they don’t see the tariff.
2.
so: Dm = Sx
a.
6000 – 100 P – 100 T = 200 P
b.
6000 – 100T = 300 P
i.
Solve for P in terms of T.
c.
Pw = 20 – 1/3 T
3.
our customers will pay Pus = (20 – 1/3 T) + T
a.
so Pus = 20 + 2/3 T
b.
This means that when we put on a tariff, the foreign
suppliers take on ½ of the tariff and the consumers
pay for 2/3
ii.
We need to find Q as a function of T. you can either use S.
1.
Q = 200 Pw = 200(20 1/3T) = 4000 – 200/3 T
2.
Then find out what the areas would be numerically, and
maximize w/respect to T.
a.
Top area = ½ (Pmax – P us)XQ
i.
½ ( 60 – (20 + 2/3T) X (4000 – (200/ 3) T)
b.
Rectangle area = t X Q
i.
(½ [60 – (200 + (2/3)T)] + t ) (4000 –
(200/3)T)
ii.
(20 – 1/3 T + T ) (4000 – 200/3 T )
iii.
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 Winter '08
 Staff
 International Trade, PW

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