Effects of Tariff
Positive Analysis
– Impact on Pd, Qd, Qs and M
– Revenue consequences for government
– Possible impact on Pw
Normative Analysis
– Impact on the well-being of Consumers,
Producers, the Nation as a whole
Defining ‘Small’ and ‘Large’ Country in
International Trade
Large Country in Trade
AUTARKY
Price
Sd
Price
foreign
Sf
Pd
Dd
Q large nation
P*
Df
Q rest of world
Small Country in Trade
AUTARKY
Price
Pd
Price
S
Sf
D
P*
Q
small nation
Df
Q
foreign or rest of world
Tariff Analysis
Small Country Importing Freely
Small Nation: Free Trade
Price
$540
Sd
Pd=$300
210
P*
Dd
0.6
1.6
omit
Q (mill. bikes)
Small Nation Sets t = 10%
P
$540
Sd
Pd’=$330
Pd =$300
210
$300+$30
P*
Dd
0.6
1.6
Q
Domestic Output Expands
P
$540
Sd
$330
$300
210
$300+$30
P*
Dd
QS QS’
QD
Q
Domestic Consumption Falls
P
$540
Sd
$330
$300
210
$300+$30
P*
Dd
QS QS’ QD’ QD
Q
Imports Shrink to M’
P
$540
Sd
$330
300
210
$300+$30
P*
Dd
QS QS’ QD’ QD
M’
Q
Tariff Revenue Increases
P
$540
$330
300
210
govt collects $30 on each foreign bike
Sd
c
$300+$30
P*
Dd
QS QS’ QD’ QD
M’
Q
Tariff Revenue Collected
P
Area c is $30 x iMports
$540
$330
300
210
Sd c $300+$30
P*
Dd
QS QS’ QD’ QD
M’
Q
Positive Effects of Tariff
SMALL COUNTRY CASE
• Increases Pd
• Increases QS
• Lowers QD
• Lowers iMports
• Raises Tariff Revenue
Normative Effects of Tariff
Focus on impact on three groups: consumers producers nation Consumer Surplus Before Tariff
P
$540
Sd
Pd=$300
210
P*
Dd
recall
0.6
1.6
Q (mill. Bikes)
Consumer Surplus After Tariff
Area Has Shrunk to Smaller Triangle
$540
Sd
Pd’=$330
Pd =$300
210
$300+$30
Dd
0.6
1.6
P*
Q (mill. Bikes)
Consumer Surplus After Tariff
P
Lost Amount is a+b+c+d
$540
Pd’=$330
Pd =$300
210
Sd a b
c
$300+$30
d
P*
Dd
QS QS’ QD’ QD
Q (mill. Bikes)
Producer Surplus Before Tariff
P
$540
Sd
$300+$30
Pd =$300
210
P*
Dd
0.6
1.6
Q (mill. Bikes)
Producer Surplus After Tariff
Area Has Increased to Larger Triangle
$540
Sd
Pd’=$330
Pd =$300
210
$300+$30
Dd
0.6
1.6
P*
Q (mill. Bikes)
Producer Surplus After Tariff
Amount of increase is area a
$540
Pd’=$330
Pd =$300
210
Sd a b
c
d
$300+$30
P*
Dd
QS QS’ QD’ QD
Q (mill. Bikes)
Normative Effects of Tariff
SMALL COUNTRY CASE
• Consumers Loss
• Producers Gain
• Govt Revenue
NATION
Area - (a + b + c + d)
Area + a
Area
+c
Area
-b
-d
TARIFFS FOR SMALL NATIONS UNAMBIGOUSLY
HARMFUL TO LIVING STANDARDS
Source of Losses
‘Deadweight’ Losses
• Triangle d – consumption efficiency loss
• Consumer surplus lost/self-imposed loss
• Triangle b – production efficiency loss
• Value of domestic resources wasted in production of extra units of domestic output; this loss is
Cost of extra
Initial cost of the domestic output replaced imports
