9_3150_tar - Chapter 15 Tariffs TARIFFS 1. Small Open...

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Chapter 15 Tariffs Econ 3150 1 TARIFFS 1. Small Open Economy, No Distortions 2. Large Open Economy, No Distortions 3. Small Open Economy with Distortions 4. Small Open Economy: Tariffs versus Production Subsidies 5. Effective Rate of Protection Tariffs are a form of commodity taxation Governments use tariffs To protect domestic industries form foreign competition (if domestic industry is less efficient than foreign industry and domestic prices are higher than prices of imports). Prohibitive tariff completely eliminates imports To raise revenues for the government (e.g. in some developing countries it is easier to tax international trade than to raise income tax).
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Chapter 15 Tariffs Econ 3150 2 1. Small Open Economy, No Distortions Result: In a small economy with no other distortions, tariffs reduce welfare by introducing distortions into relative prices. Assume a country has comparative advantage in Y , it exports Y , imports X . It imposes a tariff on imports of X => domestic relative price of X increases P τ =P*(1+ τ ). New production point Q τ X Y P τ P * U * Q * C * Q τ P * U τ C τ A * U U U A < < τ
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Chapter 15 Tariffs Econ 3150 3 Because of trade balance, Home exchanges with world along P * line which passes through Q τ . This line gives the value of domestic production at world prices. C τ - lies on the line which gives the value of domestic production at world prices - is given by tangency b/w U τ and P τ Intuition: Higher domestic price of X => producers produce more X than is optimal at world prices. Economy moves closer to autraky. Value of home output at world prices is lower => welfare loss.
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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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9_3150_tar - Chapter 15 Tariffs TARIFFS 1. Small Open...

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