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5_3150_govpol

# 5_3150_govpol - Chapter 10 Government Policies as Cause of...

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Chapter 10 Government Policies as Cause of Trade Econ 3150 YorkU 1 Government Policies as Causes of Trade 1. Introduction 2. Tax on consumption of Y 3. Tax on production of Y 1. Introduction Distinguish between 3 different prices: q- prices consumer pays p – prices producer receives p* - world price

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Chapter 10 Government Policies as Cause of Trade Econ 3150 YorkU 2 Trade small open economy Assume 2 goods X and Y CRS perfect competition small country H (has no effect on world prices) p*=p A =q=p (i.e. H does not trade. We need this assumption to neutralize all causes of trade except for tax distortions)
Chapter 10 Government Policies as Cause of Trade Econ 3150 YorkU 3 tax=% increase in price (ad valorem) e.g. 5% tax (t=0.05) tax: q=p(1+t) =1.05p=p (producer receives)+0.05p (revenue tax) subsidy: q=p(1-t)=p-0.05p b tax increases consumer price over producer price b subsidy lowers consumer price below producer price b When there are 2 goods, tax on Y is equivalent to subsidy on X

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Chapter 10 Government Policies as Cause of Trade Econ 3150 YorkU 4 Tax on Consumption Tax on Y: * * ) 1 ( y x y x y x p p t p p q q < + = - X is relatively cheaper for consumer Subsidy on X: * * ) 1 ( y x y x y x p p p s p q q < - = -“- Tax on Production Tax on Y: * * ) 1 ( y x y x y x p p t p p q q < + = - X is relatively more expensive for producer Subsidy on X:
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5_3150_govpol - Chapter 10 Government Policies as Cause of...

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