Chapter_6_Non-tariff_Barriers

They produce a homogeneous good and are small

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They produce a homogeneous good and are small compared to the market. Under perfect competition, each firm is a price-taker in its market. We will examine a small country, which has no influence on the world prices.
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Import Quotas in a Small Country Free Trade Equilibrium Panel (a) of the following figure shows the free- trade-equilibrium at a world price of PW, home quantity demanded of D1, quantity supplied of S1, with imports of M1 as before. Assuming the country is small means the world price is not affected by the import quota so the Foreign export supply curve, X*, is horizontal at PW. We can see the free trade amount of imports in panel (b) as well: M1 at PW.
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B M1 M1 A Free-Trade Equilibrium S1 D1 Quantity D Price S Price Imports Home import demand, M PW Foreign export supply, X* No-trade equilibrium (a) Home market (b) Import market At P W , Home Supplies S1, Demands D1, and Imports M1 In free trade equilibrium for a small country, Foreign faces a horizontal export supply curve, X*, at the world price PW
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Import Quotas Effect of the Quota (see the next slide) Suppose the import quota of M2<M1 is imposed. Quantity imported cannot exceed this amount. The import quota of M2 essentially leads to a vertical supply curve at M 2 in panel (b). The vertical export supply curve now intersects import demand at point C, which establishes the Home price of P2. In panel (a), the price of P2 leads firms to increase the quantity supplied to S2 and consumers to decrease their quantity demanded to D2.
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Import Quotas B A Quantity D Price S Price Imports M1 Foreign export supply, X* Home import demand, M P2 C No-trade equilibrium c a d b+d c b (a) Home market (b) Import market Foreign export supply with quota With the Quota, the Foreign export supply becomes vertical at the quota quantity The new Export Supply curve crosses the Import Demand curve at a new price and quantity of imports At the new higher price P2, Home Supply increases to S2, Demand decreases to D2 and imports fall to M2 Always have a deadweight loss of (b+d) like the tariff Consumers loses surplus of (a+b+c+d), producers gain (a). Welfare of Home depends on what happens to (c). PW S1 S2 D2 D1 M2
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Import Quotas Compare the quota with its equivalent tariff The import quota leads to an increase in the Home price and a reduction in Home imports, just like the tariff. We can see what the equivalent tariff, the tariff that would be set to give the same quantity and price as the quota, would be: t = P2 – PW. For every level of import quota, there is an equivalent import tariff.
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Import Quotas Effect on Welfare The rise in price from the quota leads to a fall in consumer surplus: (a+b+c+d). The increase in price facing Home producers leads to a gain in producer surplus: ‘ a’. What changes with the quota is the area ‘ c’ which was government revenue under the tariff.
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