Measuring the Costs and Benefits of Tariff2

Measuring the Costs and Benefits of Tariff2 - P Costs and...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Measuring the Costs and Benefits of Tariff and Subsidy. Tutional BBA International Economics. Costs and Benefits of a Tariff for the importing Country D S P Q The tariff raised the domestic price from P. ... to P . ... But lowers the foreign export price from P. .. to P* . .... Domestic production rises from Q. ... to Q. .... While domestic consumption falls from . .... To . ..... CS = PS = Gov = gains by collecting tariff revenue. = •D W L = Area b = production distortion loss. Area d = consumption distortion loss. Area e = Term of trade gain. Result from the decline in the foreign export price caused by a tariff. Subsidies • Domestic subsidy – Payments made to import-competing producers to raise the price they receive above the market price. • Export subsidy – Payments and incentives offered to export producers intended to raise the volume of
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Assume that the initial market equilibrium price is $430. Given a free-trade price of $400, the U.S. consumes …. . tons, produce . ... Tons, and imports . ...tons. U.S. is a small buyer Î change in its purchases don’t affect the world price. Suppose the government grants a production subsidy of $25 per ton. Î S 0 shift to S 1 . Net price is $425 ($400 + subsidy $25) Domestic production expand from 2 to 7 ml tons, and imports fall from 12 to 7 ml tons. Gov = Cost of subsidy. = PS = CS = •D W L = Export Subsidies: Theory Export subsidy is a payment to a firm that ships a good abroad. Like a tariff, an export subsidy can be either specific (a fixed sum pr unit) or ad valorem (a proportion of the value exported). When the government offers an export subsidy, shippers will export the good up to the point where the domestic price exceeds the foreign price by the amount of the subsidy. The effects of an export subsidy on prices are exactly the reverse of those of a tariff.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 8

Measuring the Costs and Benefits of Tariff2 - P Costs and...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online