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

importing country will rise by the amount of the tariff. As seen 
in the adjoining diagram, the higher domestic price reduces import 
demand and export supply to Q
T
.
13.2.2 WELFARE EFFECTS OF A TARIFF: 
 
(A) Large Country 
Suppose for simplicity that there are only two trading countries, one 
importing and one exporting country. The supply and demand 
curves for the two countries are shown in the adjoining diagram. 
P
FT
is the free trade equilibrium price. At that price, the excess 
demand by the importing country equals excess supply by the 
exporter.

---

P
T
FT
Q
P
IM
P
EX
P
T
T
S
IM
T
D
IM
D
S
A
B
C
D
E
F
G
H
Importing Country
P
T
FT
Q
P
IM
P
EX
P
T
T
S
EX
T
D
EX
D
S
Exporting Country
a
b
c
d
e
f
h
g
Figure 13.3 
The quantity of imports and exports is shown as the blue line 
segment on each country's graph. (That's the horizontal distance 
between the supply and demand curves at the free trade price) 
When a large importing country implements a tariff it will cause an 
increase in the price of the good on the domestic market and a 
decrease in the price in the rest of the world (RoW). Suppose after 
the tariff the price in the importing country rises to
IM
T
P
and the 
price in the exporting country falls to 
EX
T
P
. If the tariff is a specific 
tax then the tariff rate would be 
IM
EX
T
T
T
P
P
, equal to the length 
of the green line segment in the diagram. If the tariff were an
ad valorem tax then the tariff rate would be given by
1
IM
T
EX
T
P
T
P
The following Table provides a summary of the direction and 
magnitude of the welfare effects to producers, consumers and the 
governments in the importing and exporting countries. The 
aggregate national welfare effects and the world welfare effects are 
also shown.