TARIFFS & QUOTASTARIFFS & QUOTAS

TARIFFS & QUOTAS

TARIFFS ---- MAINLY IMPOSED AS INDUSTRY PROTECTION 

SOME REVENUE GENERATING PURPOSES AS WELL

IMPORT TARIFF—TARIFF ON IMPORTED ITEMS --- MOST WIDELY USED

 

EXPORT TARIFF—LESS FREQUENTLY USED -- BUT USED BY

DEVELOPING NATIONS TO SOME EXTENT

SPECIFIC TARIFF:SPECIFIC TARIFF:

$1000 TARIFF ON $20,000 ITEM IS MORE DISCOURAGING THAN 

$1,000 ON A $25,000 ITEM

AS IMPORT PRICES , THE PROTECTION EFFECT DECLINES

AD VALOREM TARIFFAD VALOREM TARIFF --- % OF THE PRICE OR VALUE DUTY

IMPORT A $20,000 ITEM AND PAY MORE AT A FIXED % THAN IF

ONE IMPORTS A $19,000 ITEM

THIS TYPE OF TARIFF MAINTAINS A CONSTANT DEGREE OF

PROTECTION --- PARTICULARLY DURING PERIODS OF PRICE

FLUCTUATION

 

20 % OF 200 = $40

20% OF 300 = $60

20 % OF 100 = $20

DETERMINING VALUE CAN BE A PROBLEM 

-        ONE METHOD IS THE CUSTOM APPRAISAL METHOD

-        ANOTHER METHOD IS THE FOB VALUATION 

TARIFF APPLIES TO PRODUCT VALUE AS IT LEAVES THE

EXPORTING NATION

CIF -- EUROPEAN METHOD (COST-INSURANCE-FREIGHT)

COMPOUND TARIFF --- OFTEN APPLIED TO MANUFACTURED GOODS  

EMBODYING RAW MATERIALS THAT ARE SUBJECT TO TARIFFS

 

SPECIFIC + AD VALOREM = TOTAL TARIFF

 

-        SPECIFIC TARIFF NEUTRALIZES COST DISADVANTAGE OF DOMESTIC MANUFACTURERS THAT RESULTS FROM TARIFF PROTECTION GRANTED DOMESTIC SUPPLIERS OF RAW MATERIALS

 

-        AD VALOREM TARIFF GRANTS PROTECTION TO FINISHED GOOD

 

COTTON PROTECTED 

THEN TEXTILECOSTS RISE

COTTON PROTECTED 

THEN TEXTILECOSTS RISE

SO SPECIFIC TARIFF ON TEXTILE IMPORTS

 TO

 PROTECT HIGH COSTDOMESTIC TEXTILE

INDUSTRY

SO SPECIFIC TARIFF ON TEXTILE IMPORTS

 TO

 PROTECT HIGH COSTDOMESTIC TEXTILE

INDUSTRY

EXAMPLE OFTHE USE OF

A COMPOUND

TARIFF

EFFECTIVE RATE OF PROTECTION 

NOMINAL RATE = GENERAL RATE OF PROTECTION 

EFFECTIVE RATE = ACTUAL LEVEL OF PROTECTION

 

 

EFFECTIVE RATE = TOTAL INCREASE IN DOMESTIC PRODUCTIVE

ACTIVITIES (VALUE ADDED) THAT AN EXISTING TARIFF

STRUCTURE MAKES POSSIBLE 

 

EFFECTIVE RATE = (n – a(b)) / 1 – a

 

n= NOMINAL RATE ON FINISHED GOOD

 

a = ratio of value of imported input to value of final product

 

b = NOMINAL TARIFF RATE ON IMPORTED INPUT

HOW THE TARIFF TAKES EFFECT

DOMESTIC PRODUCERS FOREIGN PRODUCTION

 

IMPORTS COMPONENTS PRODUCES FOR $100 COST

@ $80

 

ASSEMBLES FOR $20

 

COST = 100

 

/// IMPOSE TARIFF OF 10 % 

OF $100 = $10

 

/// SO IMPORT PRICE IS

$100 + $10 = $110

EFFECTIVE RATE = 0.1 – 0.8(0)/ 1 – 0.8 = 0.5 

 

SO NOMINAL 10 % ON FINISHED GOODS AFFORDS A 50 %

EFFECTIVE RATE

 

EFFECTIVE RATE IS 5 TIMES THE NOMINAL RATE

 

HOME PRODUCERS GET 50 % PROTECTION

VALUE OF IMPORTED INPUT DIVIDED BY VALUE OF FINISHED PRODUCT= a

AS IMPORTED INPUTS ENTER WITH LOW TARIFF WHILE FINAL

GOOD IS PROTECTED BY HIGH DUTY --- THEN GET A HIGH

PROTECTION RATE FOR DOMESTIC PRODUCERS

ONE INDUCES TARIFF ESCALATION

HOW DO MOST TEXTS CALCULATE THE EFFECTIVE RATE?

EFFECTIVE RATE = (V’ – V)/V; NOMINAL RATE = TARIFF/PRICEEFFECTIVE RATE = (V’ – V)/V; NOMINAL RATE = TARIFF/PRICE

V’ = DOMESTIC VALUE ADDED WITH NOMINAL TARIFF

V = DOMESTIC VALUE ADDED WITH FREE TRADE

OUR CASE??

NOMINAL PROTECTION IS TARIFF/PRICE = 10/100 = 10%

EFFECTIVE RATE = (30 – 20)/20 = 0.5 = 50% OR AGAIN 5 TIMES THE NOMINAL RATE

WHY? V’ = (110 – 80) = 30 AND V = (100 – 80) = 20

OR VALUE WITH TARIFF MINUS INPUT COST = 110 – 80 = 30

AND VALUE WITHOUT TARIFF MINUS INPUT COST = 100 – 80 = 20

***** BUT USING (n – a(b)/ (1-a), allows us to look at the tariff on the finished good (or n) and tariffs on any inputs imported (b) !

Suppose n = 10% and a = 20/100 = .2, and b = .05??

Effective rate =.1-.2(.05)/(1 - .2) = (.1 - .01)/.8 = .09/.8 = .1125 or 11.25%

THE CASE WE ARE USING:

FOREIGN PRODUCERS DOMESTICPRODUCERS

 

80 + 20 = 100 80 + 30 ASSEMBLY

TARIFF = 10 110 COST

PRICE = 110 

INTERNAL COST

COULD BE HIGH

--NO INCENTIVE TO REDUCE COSTS

IN FREE TRADE, THE IMPORT IS 100

DOMESTIC PRODUCER HAS TO REDUCE COST TO 20

TO COMPETE

BEFORE ANALYZING THE ECONOMIC WELFARE ISSUES OF A TARIFF

WE NEED TO LOOK AT THE GAINS OF FREE TRADE AND THEN

SEE HOW TARIFFS EFFECT THIS ECONOMIC WELFARE

WE MOVE FROM POINT A UNDER AUTARKY TO POINT B ON A HIGHER CIC AT CIC1

WHICH IS HIGHER THAN CICO AND CAN MOVE TO POINT C ON CIC2

WE ALSO GET A PRODUCTION EFFECT OF A MOVE FROM POINT A ON THE PPF TO A NEW POINT X – OVERALL PRODUCTION IMPROVES

---WHY DON’T WE MOVE TO POINT D? UNDER AUTARKY WE COULD HAVE PRODUCED IN THE INTERIOR OF THE PPF (INEFFICIENTLY) BUT DID NOT CHOOSE TO DO SO– SO THE MOVE IS FROM A TO X

NOW LET’S LOOK AT THE GAINS FROM THE IMPORT VIEWPOINT USING THE IDEAS OF CONSUMER AND PRODUCER SURPLUS

EQUILIBRIUM PRICE IS PA DERIVED BY THE INTERSECTION OF SUPPLY OF GRAPES, SG, AND DEMAND FOR GRAPES, DG --- BUT THIS PRICE IS HIGHER THAN THE WORLD PRICE, PW, AS DETERMINED BY THE LOW COST PRODUCER IN THE WORLD --- OPENING UP TO TRADE REDUCES PRICE TO THE WORLD PRICE, PW --- CONSUMERS GAIN THE AREAS, a + b + c IN CONSUMER SURPLUS, WHILE PRODUCERS TRANSFER PRODUCER SURPLUS OF AREA a TO CONSUMERS

AT THE LOWER WORLD PRICE, DOMESTIC PRODUCERS ONLY HAVE INCENTIVE TO PRODUCE AT Q1, BUT DOMESTIC CONSUMERS DEMAND Q2 ---

SO IMPORTS ARE USED TO MAKE UP THE DIFFERENCE

--- THERE IS OVERALL GAIN b + c, BUT DOMESTIC PRODUCERS LOSE PRODUCER SURPLUS

NOW LOOK AT THE GAINS FROM TRADE FROM THE VIEWPOINT OF EXPORTS

THE EXPORTER HAS LOWER COSTS OF PRODUCTION, SO THE EQUILIBRIUM OF SUPPLY OF HONEY, SH, AND THE DEMAND FOR HONEY, DH, IS AT A LOWER PRICE LEVEL, P’A, THAN WORLD PRICE, P’W---- OPENING UP TRADE BRINGS THE WORLD PRICE INTO THE PICTURE--- SO PRODUCERS CAN NOW EXPORT HONEY AT THE WORLD PRICE, P’W > DOMESTIC PRICE, P’A---- THE RESULT IS THAT PRODUCERS GAIN THE AREAS e + f + g ---- CONSUMERS LOSE CONSUMER SURPLUS OF e + f AND TRANSFER THAT GAIN TO DOMESTIC PRODUCERS

DOMESTIC DEMAND IS REDUCED, BECAUSE PRICES ARE HIGHER, TO Q3 WHILE SUPPLY IS INCREASED TO Q4 AS PRODUCERS RESPOND TO THE HIGHER PRICES FOR HONEY--- SO THE EXPORTS AMOUNT TO

Q4 – Q3

THE NET GAIN IS AREA g, BUT CONSUMERS LOSE WHILE THERE IS OVERALL GAIN

NOW LET’S IMPOSE A TARIFF { ASSUMING SMALL COUNTRY IMPLICATIONS}

UNDER FREE TRADE AT THE WORLD PRICE, PW, IN THE GRAPH BELOW (FIGURE 6.6 OF HUSTED-MELVIN), DOMESTIC PRODUCTION IS Q1, WHILE DOMESTIC DEMAND IS Q2 --- WITH THE TARIFF, WHICH IMPOSES A PRICE OF PW + t, OR THE WORLD PRICE + A TARIFF OF t, CONSUMERS LOSE CONSUMER SURPLUS IN THE AMOUNT a + b + c + d, AND TRANSFER CONSUMER SURPLUS a TO DOMESTIC PRODUCERS (GAIN IN PRODUCER SURPLUS)--- THE AREAS b AND c ARE DEADWEIGHT LOSS OF THE TARIFF AND ARE LOST TO THIS ECONOMY---IT GOES TO NO ONE!--- AREA b IS THE PRODUCTION EFFECT DEADWEIGHT LOSS, WHILE AREA d IS THE CONSUMPTIVE EFFECT OR CONSUMER DEADWEIGHT LOSS --- AREA c IS TRANSFERRED FROM CONSUMER SURPLUS AND IS CAPTURED BY THE GOVERNMENT WHO COLLECTS THE TARIFF REVENUE --- THE NET WELFARE CHANGE IS THE LOSS OF AREA b AND d

DOMESTIC PRODUCERS NOW PRODUCE Q3 EVEN THOUGH THEY ARE HIGHER COST PRODUCERS, AND DEMAND IS REDUCED FROM Q2 TO Q4 , AND REDUCES IMPORTS TO Q4 – Q3

THE DEADWEIGHT LOSSES CAN BE BROKEN DOWN AND DEFINED A BIT MORE IN DETAIL

THE AREA, a IN THE LAST GRAPH CAN BE DIVIDED INTO AREA a1 AND a2 --- a2 IS THE PRODUCER SURPLUS ON THE EXPANDED OUTPUT NOW UNDER THE TARIFF CONDITIONS THAT DOMESTIC PRODUCERS GAIN---THE COST OF THE INPUTS USED TO MAKE THAT EXPANSION IN PRODUCTION IS b + e --- BUT WITHOUT THE TARIFF, THOSE UNITS OF INPUTS COULD HAVE BEEN PURCHASED IN THE WORLD MARKET FOR e ---- SO AREA b IS THE COST OF INPUTS DEVOTED TO EXPANDING DOMESTIC PRODUCTION IN THE HIGHER-COST DOMESTIC INDUSTRY RATHER THAN HAVING THOSE UNITS PROVIDED BY LOWER-COST FOREIGN PRODUCERS

AREA d, AS INDICATED BEFORE IS THE CONSUMER DEADWEIGHT LOSS OF THE TARIFF– IT IS THE VALUE OF LOST CONSUMER SATISFACTION DUE TO SHIFT IN CONSUMPTION TO LESS DESIRED SUBSTITUTES BROUGHT ON BY THE HIGHER PRICE, OR TAX--- BEFORE THE TAX, CONSUMERS PURCHASED Q2 UNITS--- AFTER THE TAX , CONSUMPTION FALLS TO Q4 ---- CONSUMERS LOSE a + b + c BECAUSE THE AMOUNT THEY NOW BUY COSTS THEM MORE

NOW LOOK AT THE LARGE COUNTRY IMPLICATIONS

A NATION, LIKE COUNTRY A, BELOW IN THE LEFT-HAND PANEL OF THE GRAPH, MAY BE SUCH A LARGE IMPORTER THAT IT HAS INFLUENCE ON THE PRICE IN THE WORLD MARKET--- SO THAT NATIONS PURCHASES INFLUENCE PRICE ---- AT THE FREE TRADE PRICE, PFT, COUNTRY A IMPORTS Q2 - Q1 AND COUNTRY B EXPORTS Q’2 – Q’1 --- CONSUMERS IN COUNTRY A GAIN FROM TRADE BECAUSE OTHERWISE, EQUILIBRIUM PRICE WOULD BE PA --- PRODUCERS IN COUNTRY B GAIN FROM EXPORTING BECAUSE OTHERWISE PRICE RECEIVED WOULD BE AT PB --- NOTICE THAT WE ARE LOOKING AT THE MARKET FOR A SINGLE GOOD, QL, SO THE GAINS OF CONSUMERS ARE MEASURED AS GAINS IN CONSUMER SURPLUS AND THE GAINS TO PRODUCERS ARE MEASURED AS THE GAINS IN PRODUCER SURPLUS

NOW SUPPOSE COUNTRY A IMPOSES A TARIFF

AT PRICE, PFT, COUNTRY A’S DESIRED IMPORTS ARE GIVEN BY Q2 – Q1 ---- COUNTRY B’S DESIRED EXPORTS ARE GIVEN BY Q’2 – Q’1 --- AT PFT IS THE ONLY FREE TRADE EQUILIBRIUM PRICE --- IF PRICES GO ABOVE PFT, THEN DEMAND FOR IMPORTS IN COUNTRY A WILL FALL--- AND SUPPLY OF EXPORTS FROM B WILL RISE --- SO AT PRICES ABOVE PFT THERE WILL BE BE AN EXCESS SUPPLY OF QL IN WORLD MARKETS AND THIS WILL TEND TO FORCE PRICES DOWNWARD--- ANY PRICE BELOW PFT WILL CAUSE AN EXCESS DEMAND FOR QL IN WORLD MARKETS AND THE MARKET PRICE WILL TEND TO RISE --- A CHANGE IN COUNTRY A’S DEMAND FOR IMPORTED QL WILL EFFECT WORLD PRICE--- HENCE, THE MARKET POWER OF COUNTRY A---

A TARIFF IMPOSED BY COUNTRY A REDUCES IMPORTS TO Q4 – Q3 IN THAT NATION AND REDUCES EXPORTS FROM COUNTRY B TO Q’4 – Q’3 --- WE GET AN INCREASE IN PRICE IN COUNTRY A FROM PFT TO P’’ --- BUT WE HAVE ALSO CUT OFF EXPORTS IN COUNTRY B, AND SO DEMAND FOR QL IN COUNTRY B FALLS OFF AND PRICE IS REDUCED TO P’ FROM PFT

WITH THE HIGHER PRICE IN COUNTRY A, CONSUMERS LOSE a + b + c + d --- BUT PRODUCER SURPLUS RISES BY AREA a ----- GOVERNMENT REVENUE IN COUNTRY A RISES BY AREA c + e --- THE SIZE OF THE TARIFF IS THE DIFFERENCE BETWEEN WHAT IS PAID IN A, P’’ AND WHAT IS RECEIVED IN PRICE IN B, P’, THEN MULTIPLY BY THE IMPORTS (Q4 – Q3) --- SO PRICE HAS GONE UP IN A BUT NOT BY THE FULL AMOUNT OF THE TARIFF --- SO THE QL COMES INTO A AT A LOWER PRICE

LOOK AT THIS AGAIN!

ONCE THE TARIFF IS IMPOSED, THE NEW PRICE IN COUNRY A IS P’’ ( = P’ + t ) ----- SO THE AREA c + e REPRESENTS THE TARIFF PROCEEDS PAID BY COUNTRY A’S CONSUMERS TO THE GOVERNMENT OF COUNTRY A--- BUT PRODUCERS PAY PART OF THIS GIVEN THAT THEY HAVE TO TAKE A LOWER PRICE BECAUSE IMPORTS ARE REDUCED IN COUNTRY A, MEANING THAT EXPORTS FROM B TO A HAVE ALSO FALLEN OFF BECAUSE OF THE TARIFF --- ECONOMIC WELFARE INCREASES IN COUNTRY A IF e > (b + d) ---- SO e IS THE AMOUNT OF TARIFF PAID BY FOREIGNERS BECAUSE THE WORLD PRICE OF THEIR EXPORTS HAS FALLEN---- THE AMOUNT (b +d) IS THE USUAL DEADWEIGHT LOSS OF THE TARIFF ---- THE SMALLER IS THIS DEADWEIGHT LOSS THE GREATER LIKELIHOOD THAT WELFARE WILL INCREASE IN COUNTRY A BY IMPOSING A TARIFF --- THIS WOULD BE CALLED AN OPTIMUM TARIFF IF THE WELFARE IS INCREASED IN COUNTRY A

WELFARE IS INCREASED BY SETTING A TARIFF IN THE LARGE COUNTRY CASE (CASE OF THE LARGE IMPORTER)

IF e > (b + d)

SUCH A TARIFF WOULD BE CALLED AN OPTIMAL TARIFF

NONTARIFF BARRIERS --- LIKE QUOTAS

QUOTA--- A GOVERNMENT MANDATED LIMITATION ON EITHER THE QUANTITY OR THE VALUE OF TRADE IN A PRODUCT

QUOTAS THAT ENTIRELY ELIMINATE TRADE IN A CERTAIN PRODUCT ARE KNOWN AS EMBARGOES ----- THE U.S. BANS IMPORTS FROM IRAN, IRAQ, LIBYA, CUBA (MOST PRODUCTS) AND NORTH KOREA

TRQ’S--- TARIFF RATE QUOTAS – QUOTA POLICIES THAT ALLOW A CERTAIN QUANTITY OF A GOOD INTO A COUNTRY AT LOW (OFTEN ZERO) TARIFF RATES --- BUT THEN A SIGNIFICANTLY HIGHER TARIFF IS IMPOSED IF IMPORTS EXCEED THE QUOTA

THE U.S. HAS IMPOSED TRQ’S ON TEXTILES, MILK, CREAM, BUTTER, MARGERINE, SUGAR, PEANUTS, COTTON

CHINA IMPOSES TRQ’S ON GRAINS

THE WELFARE EFFECTS OF QUOTAS

AS SHOWN IN THE GRAPH BELOW, THE IMPOSITION OF A QUOTA RAISES DOMESTIC PRICE AND LOWERS CONSUMER SURPLUS ---- CONSUMERS LOSE a + b + c + d --- THE AREA a IS TRANSFERRED TO PRODUCER SURPLUS IN THE IMPORTING NATION BECAUSE THE FOREIGN COMPETITION HAS BEEN LOWERED --- b AND d REPRESENT THE DEADWEIGHT LOSS OF THE QUOTA ----- AREA c IS THE VALUE OF QUOTA RENTS --- THESE ARE PROFITS THAT ACRUE TO WHOMEVER HAS THE RIGHT TO BRING IN THE IMPORTS AND SELL THEM AS PROTECTED GOODS ---- IF THE GOVERNMENT MAINTAINS THOSE RIGHTS, THEY GET THE REVENUE BY SELLING QUOTA RIGHTS TO IMPORTERS OR TO EXPORTERS WHO SHIP IN THE GOODS

NET WELFARE CHANGE IS A LOSS OF b + c + d, IF GOVERNMENT DOES NOT CAPTURE THE QUOTA RENTS, OR IF THEY DO, THEN THE NET LOSS IS b + d

THE VOLUNTARY EXPORT RESTRAINT – VER

THE IMPORTING GOVERNMENT MAKES AN AGREEMENT WITH A FOREIGN GOVERNMENT TO HAVE THE FOREIGN GOVERNMENT IMPOSE VOLUNTARY RESTRICTION ON EXPORTS INTO THE IMPORTING NATION --- IN RETURN FOR RESTRICTING IMPORTS, THE EXPORTERS ARE ALLOWED TO RAISE THEIR PRICES, THUS EARNING THE QUOTA RENTS IN ADDITION TO THEIR NORMAL PROFITS ---- THE WELFARE COSTS OF THE VER IN THE IMPORTING NATION ARE THEN b + c + d BECAUSE CONSUMERS LOSE a + b + c + d, DOMESTIC PRODUCERS GET a, AND FOREIGN EXPORTERS UNDER THE RESTRAIN GET c

WHAT ABOUT A DOMESTIC PRODUCTION SUBSIDY VS A TARIFF?

START OUT WITH SUPPLY, S --- THEN SUBSIDIZE PRODUCTION TO MOVE SUPPLY DOWN TO S’ ---- THEN WHEN SUPPLY INTERSECTS WORLD PRICE, PW, ALLOW FREE TRADE AT THE WORLD PRICE --- PRODUCTION INCREASES FROM QO TO Q1 --- PRODUCERS RECEIVE a + b – TAXPAYERS PAY TAXES TO THE GOVERNMENT AND THE GOVERNMENT THEN USES THE TAX REVENUE TO OFFER THE SUBSIDY--- DOMESTIC PRODUCER PROFITS RISE BY a, AND b GOES TO HIRE RESOURCE TO PRODUCE THE NEW AMOUNT, Q1---- SO b IS THE DEADWEIGHT COST OF GOVERNMENT POLICY FOR THE SUBSIDY --- SO CONSUMERS LOSE a + b IN THE FORM OF HIGHER TAXES WHILE PRODUCERS GAIN a IN PROFITS --- THE COST TO SOCIETY IS b

BUT IF A TARIFF IS IMPOSED, THEN PRICE BECOMES PW + t (WORLD PRICE + THE TARIFF)--- PRODUCERS THEN CAN PRODUCE AT Q1 --- CONSUMERS LOSE CONSUMER SURPLUS, BUT GOVERNMENT GETS THE TARIFF REVENUES---- BUT THE LOSS TO SOCIETY IS THE DEADWEIGHT LOSS OR b + d COMPARED TO THE SUBSIDY AND THEN FREE TRADE POLICY LOSS OF b

WHAT SHOULD A NATION DO TO COUNTERACT A FOREIGN MONOPOLY EXPORTER?

IBM EXPORTS PRODUCT INTO BRAZIL, BUT IS THE ONLY SUPPLIER OF THAT PRODUCT ( A MONOPOLY SELLER IN BRAZIL) ---- DEMAND AND MARGINAL REVENUE CONDITIONS FOR THE MONOPOLIST ARE GIVEN BY DB AND MRB, RESPECTIVELY----IBM EQUATES MARGINAL COST, MC, WITH MARGINAL REVENUE TO MAXIMIZE PROFIT (SETTING MRB = MC, SUPPLY Q* OF PRODUCT INTO BRAZIL AND DERIVING THE MONOPOLY PRICE FROM THE DEMAND CURVE OF P*--- MONOPOLY PROFIT IS THE BLUE SHADED AREA---- WHAT CAN BRAZIL DO TO COUNTERACT THIS MONOPOLY SITUATION? ---- SO LONG AS IBM DOES NOT CHARGE A PRICE HIGHER THAN P*, BRAZIL CAN IMPOSE A TARIFF, P* - C, AND ATTEMPT TO EXTRACT THE MONOPOLY PROFITS FROM IBM --- IN DOING SO, BRAZIL HAS TO STOP SHORT OF A TARIFF THAT WOULD BE GREATER THAN P* - C --- SO NOW SOME OF IMB’S MONOPOLY PROFITS REMAIN IN BRAZIL AS GOVERNMENT REVENUES --- NO DEADWEIGHT LOSSES ARE IMPOSED ON BRAZIL OR THE COUNTRY IN WHICH IBM IS HEADQUARTERED BECAUSE NEITHER PRICES NOR TRADE LEVELS ARE AFFECTED--- BRAZIL RECAPTURES PROFITS

MC = MARGINAL COSTMC = MR

MONOPOLY PROFITS

TRY A PROBLEM!! DOMESTIC DEMAND AND SUPPLY ARE GIVEN, RESPECTIVELY BY Q = 100 – P (DEMAND) AND Q = 50 + 2P (SUPPLY) --- Q = QUANTITY, AND P = PRICE

IF WORLD PRICE IS 10, WHAT IS THE FREE TRADE LEVEL OF IMPORTS?

SO, FOR DEMAND Q = 100 –(10) = 90, AND FOR SUPPLY Q = 50 + 2(10) = 70, SO IMPORTS ARE DEMAND MINUS SUPPLY WHICH IS 90 – 70 = 20

SUPPOSE THAT THE COUNTRY IMPOSES A QUOTA OF 11 UNITS. HOW MUCH WILL THE DOMESTIC PRICE RISE?

WELL, DEMAND MINUS SUPPLY IS NOW 11, OR (100 – P) – (50 + 2P) = 11, OR 100 –50 –3P = 11, OR 3P = 100 – 50 – 11 , OR 3P = 39, OR P = 39/3 = 13---- SO PRICE IS NOW 13, RISING FROM 10 TO 13

WHAT ARE THE WELFARE EFFECTS? CONSUMERS LOSE CONSUMER SURPLUS--- PRODUCERS GAIN PRODUCER SURPLUS, AND THE NET WELFARE OF THE SOCIIETY IS A LOSS OF PROTECTION DEADWEIGHT LOSS + CONSUMPTION DEADWEIGHT LOSS AND POSSIBLY QUOTA RENTS DEPENDING ON WHO CAPTURES THE QUOTA RENTS

IF THE COUNTRY NEGOTIATES A VER, THE THE LOSS TO SOCIETY IS THE SUM OF THE DEADWEIGHT LOSSES PLUS THE QUOTA RENTS