10_3150_quotas

10_3150_quotas - Chapter 16 Quotas and Other Non-Tariff...

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Chapter 16 Quotas and Other Non-Tariff Barriers Econ 3150 York U 1 QUOTAS AND OTHER NON-TARIFF BARRIERS 1. Welfare Effects of Quotas 2. Welfare Effects of Quotas and Tariffs 3. Excess Demand Analysis 4. 3 Cases When Quotas Are Not Equivalent to Tariffs Economic Growth in H Price Fluctuations Domestic Monopoly in Importing Sector 5. Other Non-Tariff Barriers 6. Welfare Costs of Protection 1. Welfare Effects of Quotas Tariffs – directly increase price, indirectly reduce quantity Quotas – directly reduce quantity, indirectly increase prices Result: In economy with no distortions and changes, effect of tariffs and quotas on prices and quantities are similar.
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Chapter 16 Quotas and Other Non-Tariff Barriers Econ 3150 York U 2 Welfare effects are different because of re-distributional differences. Assume Home country imports X and exports Y . Free Trade: C*, Q* Imports: M* Quota: M , binding quota: M < M*. Quota creates artificial scarcity of X => price of X increases. Both producers and consumers face higher price of X . Q q - production at distorted prices; P* – value of home production at world prices; imports is M = X c -X q X Y P q P * U * Q * C * Q q P * U q C q A Xq Xc quota= M
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Chapter 16 Quotas and Other Non-Tariff Barriers Econ 3150 York U 3 C q on P q Imports of X = M is given by tangency of U q to P q Quota’s effect on welfare is identical to the effect of a tariff that increases relative prices to P q . 2. Welfare Effects of Quotas and Tariffs Utility falls in both cases. 1. Tariffs are collected by government at customs. Government uses tariff revenues to increase government expenditures => tariff revenues are re-distributed back to consumers. 2. Quota is a permit to import some fixed amount of X into a country during a specified period. Binding quota creates artificial scarcity, which allows importers to sell X at prices P q >P*. Quota rents (P q -P*) are received by a small group of importers. If quota rents were redistributed back to consumers then welfare effects of quotas and tariffs would be identical.
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Econ 3150 York U 4 Quota rights a. Are granted to former importers to compensate them for the loss in the volumes of imports. b. Auctioned. Note: maximum bid=P q -P*=quota rents. Government gets quota rents and re-distributes them back to consumers c. Most commonly (especially in developing countries) are granted to friends, for political favors or for bribes. Under quota there are 2 sources of welfare loss: loss in welfare as a result of unfair re-distribution of rents and loss as a result of waste-full rent seeking activities. Tariffs are less costly means of protection. 3.
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This note was uploaded on 06/09/2010 for the course AP 3150 taught by Professor Allalileeva during the Winter '09 term at York University.

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10_3150_quotas - Chapter 16 Quotas and Other Non-Tariff...

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