Principles of Economics- Mankiw (5th) 185

Principles of Economics- Mankiw (5th) 185 - CHAPTER 9 A P P...

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CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 191 This analysis should seem somewhat familiar. Indeed, if you compare the analysis of import quotas in Figure 9-7 with the analysis of tariffs in Figure 9-6, you will see that they are essentially identical. Both tariffs and import quotas raise the do- mestic price of the good, reduce the welfare of domestic consumers, increase the welfare of domestic producers, and cause deadweight losses. There is only one difference between these two types of trade restriction: A tariff raises revenue for the government (area E in Figure 9-6), whereas an import quota creates surplus for license holders (area E' ± E'' in Figure 9-7). Tariffs and import quotas can be made to look even more similar. Suppose that the government tries to capture the license-holder surplus for itself by charging a fee for the licenses. A license to sell 1 ton of steel is worth exactly the difference be- tween the Isolandian price of steel and the world price, and the government can
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