Problem Set 2: Tariffs and Non-Tariff Barriers under Perfect Competition - Answer Key

Transcription

1 ECO 6333: Trade olicy Spring 2019 Thomas Osang roblem Set 2: Tariffs and Non-Tariff Barriers under erfect Competition - Answer Key art I: F C T F C t F Q t F Q T F IC(p T ) path IC(p t d) path C C u T u t B E B E p T line p T line C T C t Q t Q T C C C C p t d line p t d line C Free trade equilibrium: B: production point C: consumption point BEC: trade triangle u T utility 1

2 ost import tariff equilibrium: B : production point C : consumption point B E D : trade triangle u t utility art II: 1. Setting S=D gives A = 9 and Q A = Given T = 7, we have D T = 19 and S T = 9, so M T = D T S T = q d = 7.4. Also, D q = Also, S q = (a) Consumer surplus without quota: Consumer surplus with quota: So, import quota reduces consumer surplus. (b) roducer surplus without quota: roducer surplus with quota: 24. So, import quota increases producer surplus. (c) Quota rent: 3.2 (d) Welfare without a quota = CS + S = Welfare with quota = CS + S + Quota rent = Change in welfare = = -0.4 (i.e. a welfare loss due to quota = DWL) 2

3 art III: 1. A quota differs from a tariff in that the quantity of imports is fixed and the domestic price adjusts, whereas with a tariff, the domestic price is altered and the quantity imported adjusts. The effects on consumers and producers (domestic and foreign) of a quota are analogous to those of an equivalent tariff. However, there is no tariff revenue generated for the government. The equivalent of the tariff revenue which is generated with a quota (often referred to as the quota rent ) can go to the domestic government if the rights to import (the quota right or license) are auctioned off by the government. If the government does not sell the import quota rights, the quota rent can go to organized foreign producers in the form of higher selling prices, to domestic importing firms as they buy at the lower international price and sell at the higher domestic price, or some combination of the two. 2. (a) The term transfers to Japan refers to the VER rent that is captured by Japanese exporters in the case of a VER agreement. It is called a transfer since it is equivalent to a monetary payment by U.S. consumers to Japanese producers. (b) The transfers would arise under an import quota as well if the U.S. government were to give away the import licenses for free. However, if the government decides to sell the import licenses (for example through an auction), the quota rent would be collected by the U.S. government. 3

4 art IV: Question Recall that tariff revenue equals tariff (in $) multiplied by the amount of imports. In panel (b) of the figure below, this is represented by the rectangle α plus β. With the TRQ, only M M 2 imports are subject to the tariff. Therefore, the government collects area β as tariff revenue. Because the new domestic price is p t d, someone has the ability to buy or produce abroad at T and sell domestically at p t d. This differential is called quota rent and is equivalent to area α in panel (b). 2. If the quota rent stays at home (i.e., is collected by the home government), the home welfare is the same as under a tariff. However, if the quota rent is given to the foreign country, the home welfare is less than under a tariff. Similarly, if the quota rent stays at home, foreign welfare is unchanged, whereas if quota rents are sent abroad, the foreign welfare is higher. 3. Given that the foreign country s welfare decreases with the addition of a tariff due to the decline in its exports, the home country can make the situation more politically palatable by implementing a TRQ and giving away the quota rents to the foreign country. S t d T S T S t D t D T D Q α β M M 2 M T Foreign Exp. Supply t Foreign Exp. Supply T Dom. Import Demand Q (a) HC (b) Intern. Market 4

5 Question With the quota removal, domestic consumption increases from 200 to 250 units, whereas production decreases from 150 to 100 units. HC IM a b c d c b+d Q Q 2. Consumers gain areas a + b + c + d with the removal of the quota. 3. roducers lose area a with the removal of the quota. 4. The quota rent is equal to 50 = ( )x( ). 5. The gain to the country from the removal of the quota is equal to quota rent (assuming that the government did not collect the quota rent with the quota system in place) plus DWL. The DWL is equal to areas b + d. area b = 25 = 0.5x( )x( ) area d = 25 = 0.5x( )x( ) Gain to the country is thus equal to 100 =