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

(B) Small Country Case 
The small country assumption means that the country's imports are 
a very small share of the world market. So small, that even a 
complete elimination of imports would have an imperceptible effect 
upon world demand for the product and thus would not affect the 
world price. Thus when a tariff is implemented by a small 
country, there is no effect upon the world price.

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P
Q
XS
MD
T
FT
US
Mex
T
FT
Q
Q
P
Mex
T
P
US
P
T
=
 
Figure 13.2 
To depict the price effects of a tariff using an export 
supply/import demand diagram, we must redraw the export supply 
curve in light of the small country assumption. The assumption 
implies that the export supply curve is horizontal at the level of the 
world price. From the perspective of the small importing country, it 
takes the world price as exogenous since it can have no effect 
upon it. From the exporters perspective, it is willing to supply as 
much of the product as the importer wants at the given world price.
When the tariff is placed on imports, two conditions must hold in the 
final equilibrium; the same two conditions as in the large country 
case. Namely,
Mex
US
T
T
P
P
T
US
US
Mex
Mex
T
T
XS
P
MD
P
However, now P
T
US
remains at the free trade price. This implies 
that in a small country case, the price of the import good in the