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Unformatted text preview: ECON0301 Theory of International Trade Calculating Optimal Tariff Rate Home demand for the importible good D = a — b? 9A-1
Home supply of the importible good
Q = e +ﬁ-7’ ‘ 9A-2
Home import demand
D—Q=(a—e)—(b+f)l5 ‘ 9A-3
Foreign export supply
(Q* — D*) = g+ th ‘ 9A-4 Internal price exceeds ext. price by tariff N P = PW + t 9A-5
In world equilibrium, Home import demand equals Foreign export supply (a—e)—(b+f)x(Pw+t)=g+th 9A-6 N P = Pp + th/(b +f+ h) 9A-7 where P; is free trade price (solved from 9A-6) Pw = PF—t(b +f)/(b +f+ h) 9A-8
Due to tariff, Home supply rises from Q1 to Q2
Q2 = Q1+tfh/(b+f+h) 9A-9
Home demand falls from D] to D2
02 = D1 — tbfh/(b +f+ h) 9A-10 Gain = (D2 — Q2) x t(b +/)/(b +f+ h)
——(t)2 xh(b+f)2/(b +f+/1)2 Loss = (1/2) x (Q2 — Q) X (ﬁ—Pp)
+(1/2)x(1)1 -—D2)x (13—19;) = (02 x (b +/) x (h)2/2(b +f+ h)2 9A-12
The net effect on welfare, therefore, is
Gain - loss = ix U— (I)2 x V 9A-13
where U and V are +ve terms independent of t.
optimal tariff: t* = L 2V PrTW . F ...
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This note was uploaded on 02/23/2011 for the course ECON 301 taught by Professor S.chiu during the Spring '11 term at HKU.
- Spring '11