optimaltariff - ECON0301 Theory of International Trade...

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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) =tx(D‘—Q‘)x(b+f)/(b+f+h) 9A-11 ——(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. Hence, optimal tariff: t* = L 2V PrTW . F ...
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