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Economics of a Tariff Lecture 6
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Tariffs |
Tariff – a tax on an imported good
Specific tariff – a tax is $ per good
Does not change slopes of demand and supply functions
Easy to apply and administer
Protection is low for high priced goods
Similar to an excise tax on gasoline, cigarettes, and liquor
Ad valorem tariff- tax is percentage of market value
Ad valorem – on the value
Provides constant degree of protection
More complex to administer; gov. has to know products' values
Changes slopes of demand and supply functions
Similar to a sales tax
Examples
Libya, Hong Kong, Macau, and Singapore have no tariffs
Entrepot - Hong Kong and Singapore import and then export products (like a middleman or intermediary)
Developed countries have low tariffs
Developing countries tend to have higher tariffs; governments depend on the tariff revenue or protects domestic industry
Most economists are free traders
Protection
Tariffs protect domestic industry
Promotes growth of monopolies - monopolies charge a higher price, reduce quantities to the market, and provide poor customer service
Tariffs may harm society through indirect effects
Tariffs may increase costs to the export industries if protected product is used as an input
Tariffs cause higher prices; workers may strike or demand higher wages
Tariffs reduces a foreign country's earnings; foreigners have less money to buy imports from tariff country
Beg thy neighbor policy - a country imposes a tariff to boost the domestic industries; other countries may increase tariffs, triggering a tariff war
International trade promotes competition and efficiency
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The Economics of a Tariff |
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Tariffs decrease the world’s social welfare
A tariff creates a price wedge
Domestic consumers pay a greater price
Exporting foreign firms receive a lower price
Government collects tariff revenue
Domestic producers benefit from tariffs
Tariffs for a Large Country
The Welfare Effects on the U.S. from the U.S. Government's Tariff |
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The Welfare Effects on China from the U.S. Tariff |
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Small Country Case
The Imports and Exports for a Small Country |
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The Welfare Effects for a Small Country that Imposes a Tariff |
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Free trade
Tariff
Consumers' surplus = a + c
Producers' surplus = g + b
Gov. revenue = e
Welfare = a + b + c + e + g
Society lost d + f
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The Optimal Tariff |
The Optimal Tariff for a Large Country |
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Note – a tariff reduces the world’s welfare
However, a large country can gain by imposing a tariff
Gov. gains r from tariff revenue from exporting country
However, that country loses e + g domestically
A large country does not look at q + s, because that is loss to exporting country
Optimal tariff is a county gains from a tariff if r > e + g
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