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GWLecture8 - Part IIa Paper 1 General Equilibrium and...

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Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Sönje Reiche
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2 Outline Analysis of Import Tariffs Observed Patterns of Trade Economies of Scale (K&O, Ch. 6) Internal Economies External Economies Infant Industry Protection (K&O, Ch. 10) Strategic Trade Policy (K&O, Ch. 11) Factor Mobility (K&O, Ch. 7)
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3 General Equilibrium Effect of Tariffs x y y x p p - y x p p MRS = d x d y y x p p MRT = s y s x Import E x p o r t
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4 x y y x p p - d x d y s y s x Impose a tariff on good x (Tax revenue is given back to consumers) y x p t p + - d t x s t x d t y s t y Losers Consumers Producers of y Winners Producers of x
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5 Tariffs in a Large Country Terms of trade = price import price export Possible to affect world prices by imposing tariffs Effect of a tariff: reduces imports from ROW, creating excess supply in ROW, drives prices of imports down improves terms of trade
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6 x p S D ROW p Imports A C D ROW p ' t p p ROW D + = ' B Producer gain: A Revenue gain: B+E Consumer loss: A+B+C+D E Net loss: C + D - E Terms of trade gain
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7 Common Agricultural Policy S x p D AUT p ROW p D p t guarantee high prices: excess supply XS excess sold as subsidised exports driving world price down
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