International Economics
Partial Equilibrium Effects of a Tariff in a Large Nation
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Dominick-Salvatore-International-Economics
Partial Equilibrium Effects of a Tariff in a Large Nation In Section 8.2, we examined the partial equilibrium effects of a tariff in a small nation (i.e., one that does not affect commodity prices by its trading). We now extend the analysis to Salvatore c08.tex V2 - 11/15/2012 7:42 A.M. Page 245 A8.1 Partial Equilibrium Effects of a Tariff in a Large Nation 245 E J H N I A G C M K a b c e d B X 0 10 20 25 30 40 50 60 70 4.00 3.00 2.50 2.00 1.67 1.00 S H + F + T S H + F S H D H T = 50% X P X ($) P X ($) S H 0 10 20 1 2 3 4 X P X ($) S F 0 10 30 1 2 3 4 X P X ($) S H + F 0 20 50 1 2 3 4 Home Supply Curve of X Foreign Supply Curve of Exports of X Total Supply Curve of X (Home Plus Foreign) FIGURE 8.8. Partial Equilibrium Effects of a Tariff in a Large Nation. In the top panel, S H is the domestic supply, S F is the foreign supply, and S H +F is the total supply of X to the nation. With free trade, D H (the home demand for X) intersects S H +F at B (in the bottom panel) so that P X = $2 and Q X = AB = 50 (AC = 20X supplied domestically and CB = 30X by foreigners). With a 50 percent ad valorem import tariff, S H +F shifts up to S H +F+T . D H intersects S H +F+T at H and P X = $2.50 and Q X = GH = 40 (GJ = 25X supplied domestically and JH = 15X by foreigners). The loss of consumer surplus is area a + b + c + d = $22.50, of which a = $11.25 is the higher rent of domestic producers, c = $7.50 is the tariff revenue collected from domestic consumers, and b + d = $3.75 is the protection cost or deadweight loss to the nation. Since the nation also collects MNIK = e = $4.95 from exporters, the nation receives a net gain of $1.20 from the tariff. examine the partial equilibrium effects of a tariff imposed by a large nation. This is done by using Figure 8.8, which is similar to but more complex than Figure 8.3. In the top panel of Figure 8.8, S H is the home or domestic supply curve of commodity X in the large nation, S F is the foreign supply curve of exports of commodity X to the nation, and S H +F is the total supply curve of commodity X to the nation. S H +F is obtained as the (lateral) summation of the home supply curve, S H , and S F , the foreign supply curve Salvatore c08.tex V2 - 11/15/2012 7:42 A.M. Page 246 246 Trade Restrictions: Tariffs of exports of commodity X to the nation. For example, at P X = $1, 10X will be supplied domestically and 10X from abroad, for a total of 20X. At P X = $2, 20X will be supplied domestically and 30X from abroad, for a total of 50X. The S F curve is positively sloped (rather than horizontal, as in the small-nation case in Figure 8.1) because the large nation must pay higher prices to induce foreigners to supply more exports of commodity X to the nation. In the bottom panel of Figure 8.8, we see that with free trade, D H (the home demand curve for commodity X in the nation) intersects S H +F (the same as in the top panel, except for being drawn on a larger scale) at point B , so that P X = $2 and Q X = AB = 50 (of which AC = 20X are supplied by domestic producers and CB = 30X by foreigners). If the nation now imposes a 50 percent ad valorem import tariff (T) on commodity X, the total supply curve will shift up by 50 percent and becomes S H +F+T . Now D H intersects S H +F+T at point H , so that P X = $2.50 and Q X = GH = 40 (of which GJ = 25X are supplied by domestic producers and JH = 15X by foreigners). The loss of consumer surplus resulting from the tariff is equal to area a + b + c + d = $22.50, of which a = $11.25 is the higher rent received by domestic producers, c = $7.50 is the tariff revenue collected by the nation’s government from domestic consumers, and the remainder (the sum of triangles b + d = $3.75) is the protection cost or deadweight loss to the nation. The nation’s government, however, also collects IKMN = e = ($0.33)(15) = $4.95 from foreign exporters. The reason for this is that by increasing P X , the tariff reduces consumption and imports of commodity X in the nation, and since the nation is large, the smaller quantity of exports will be supplied at a lower price. Specifically, with the tariff domestic consumers pay $2.50 (as compared with P X = $2.00 under free trade), whereas foreign exporters receive only P X = $1.67 (instead of $2.00 under free trade). Thus, foreign exporters share the burden of the tariff with domestic consumers. Now that the nation is large, the tariff will lower the price of imports to the nation as a whole (i.e., the nation receives a terms-of-trade benefit from the tariff). The protection cost or deadweight loss to the nation from the tariff must now be bal- anced against the terms-of-trade benefit that the nation receives. Since in this case the terms-of-trade benefit to the nation of $4.95 (e) exceeds the protection cost of the tariff of $3.75 (b + d), the nation receives a net benefit of $1.20 (e − b − d) from the tariff. If the terms-of-trade benefit equaled the protection cost, the nation would neither gain nor lose from the tariff. Finally, if the terms-of-trade benefit were smaller than the protection cost, the nation would lose. Note that a small nation always incurs a net loss from a tariff equal to the protection cost or deadweight loss because the small nation does not affect foreign export or world prices (so that e = 0). Even if, as in the above example, the nation gains from the tariff, the terms-of-trade benefit to the nation represents a loss to foreigners. As a result, foreigners are likely to retaliate with a tariff of their own, so that in the end both nations are likely to lose from the reduced level of trade and international specialization (see the discussion of the optimum tariff in Section 8.6). Download 7.1 Mb. Do'stlaringiz bilan baham: |
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