Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

P
Q
XS
MD
T
FT
US
Mex
Aut
P
T
FT
Q
Q
Mex
P
Mex
Aut
P
T
P
US
P
T
US

---

Figure 13.1 
The tariff equilibrium is depicted graphically on the adjoining graph. 
The Mexican price of wheat rises from P
FT
to 
M
T
P
which reduces its 
import demand from Q
FT
to Q
T
. The US price of wheat falls from P
FT
to 
US
T
P
which reduces its export supply, also from Q
FT
to Q
T
. The 
difference in the prices between the two markets is equal to the 
specific tariff rate T.
Notice that there is a unique set of prices which satisfies the 
equilibrium conditions for every potential tariff that is set. If the tariff 
were set higher than T, the price wedge would rise causing a 
further increase in the Mexican price, a further decrease in the US 
price and a further reduction in the quantity traded.
At the extreme, if the tariff were set equal to the difference in 
autarky prices, (i.e. 
Mex
US
Aut
Aut
T
P
P
) then the quantity traded 
would fall to zero. In other words the tariff would prohibit trade. 
Indeed any tariff set greater than or equal to the difference in 
autarky prices would eliminate trade and cause the countries to 
revert to autarky in that market. Thus we define a prohibitive tariff 
as any tariff, T
pro
, such that,
Mex
Us
pro
Aut
Aut
T
P
P
For an intuitive explanation about why these price changes would 
likely occur in the a real world setting, read the following.