Measuring the Costs and Benefits of TariffV.Tutor

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Measuring the Costs and Benefits of Tariff and Subsidy. Tutional BBA International Economics.
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Costs and Benefits of a Tariff for the importing Country D S P Q
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The tariff raised the domestic price from P. . w.. to P ..t .. But lowers the foreign export price from P.w. . to P* .t. ... Domestic production rises from Q. .1. . to Q. .2. ... While domestic consumption falls from . .... To . ..... CS = - (a + b + c + d) PS = + a Gov = gains by collecting tariff revenue. = c + e •D W L = b + d – e Area b = production distortion loss. Tariff leads domestic producer to produce too much of this good, Area d = consumption distortion loss. Tariff leads consumers to consume too little of the good. Area e = Term of trade gain. Result from the decline in the foreign export price caused by a tariff.
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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 exports.
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Assume that the initial market equilibrium price is $430. Given a free-trade price of $400, the U.S. consumes 14 tons, produce . .2. . Tons, and imports . .12. .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. = (a + b) = 25*7 = $175 ml PS = + a = (112.5 ml) CS = nothing change. •D W L = b Î a protective effect = $62.5 ml
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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.
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This note was uploaded on 10/13/2010 for the course INTER BUS IB121 taught by Professor Miko during the Spring '10 term at UC Riverside.

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Measuring the Costs and Benefits of TariffV.Tutor -...

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