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Analysis of A Tariff: Chapter 8 of P & L

A tariff is a tax on imported goods. It raises the domestic price of imported goods. - A tariff lowers world economic well-being and usually lowers the well-being of the country imposing it. However, a "nationally optimal tariff" could potentially gain a country if it can affect world prices. - A tariff benefits domestic producers by raising the price of imports above the world price. This increases domestic production and producer surplus. - Consumers are harmed by a tariff as it raises prices. Consumer surplus falls as some consumers buy less and others pay higher prices. - The government gains tariff revenue from taxing imports, but the overall national

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76 views

Analysis of A Tariff: Chapter 8 of P & L

A tariff is a tax on imported goods. It raises the domestic price of imported goods. - A tariff lowers world economic well-being and usually lowers the well-being of the country imposing it. However, a "nationally optimal tariff" could potentially gain a country if it can affect world prices. - A tariff benefits domestic producers by raising the price of imports above the world price. This increases domestic production and producer surplus. - Consumers are harmed by a tariff as it raises prices. Consumer surplus falls as some consumers buy less and others pay higher prices. - The government gains tariff revenue from taxing imports, but the overall national

Uploaded by

Sittie Aliah Tomawis
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Analysis of a Tariff

Chapter 8 of P & L
What is a tariff?

Tariff - as the term is used in international trade, is a tax on importing a


good or service into a country, usually collected by customs officials at
the place of entry.
Tariffs come in two main types:
1.specific tariff - is stipulated as a money amount per unit of import,
such as dollars per ton of steel bars or dollars per eight-cylinder two-
door sports car.
2. ad valorem (on the value) tariff - is a percentage of the estimated
market value of the goods when they reach the importing country.
A PREVIEW OF CONCLUSIONS
• A tariff almost always lowers world well-being.
• A tariff usually lowers the well-being of each nation, including the
nation imposing the tariff.
• The “nationally optimal” tariff discussed near the end of this chapter is
a possible exception to the case for free trade. When a nation can affect
the prices at which it trades with foreigners, it can gain from its own
tariff. (The world as a whole loses, however.)
• A tariff absolutely helps those groups tied closely to the production of
import substitutes, even when the tariff is bad for the nation as a whole.
THE EFFECT OF A TARIFF ON DOMESTIC
PRODUCERS
THE EFFECT OF A TARIFF ON DOMESTIC
PRODUCERS

Assumption: small country ,that is our nation is a competitive “price-


taker” in the world markets for the products we trade.

producer surplus – the amount a seller is paid for a good minus the
seller’s cost of production. Graphically, producer surplus is the area
above the supply curve and below the market price line.

Cost- the value of everything a seller must give up to produce a good.


THE EFFECT OF A TARIFF ON DOMESTIC
PRODUCERS
• If the world price is $300 per bike, with free trade the country’s
consumers buy 1.6 million bikes, and its local firms produce 0.6
million bikes, so 1.0 million bikes are imported.
• With free trade domestic producer surplus is area CBA and domestic
consumer surplus is area FEC.
THE EFFECT OF A TARIFF ON DOMESTIC
PRODUCERS
THE EFFECT OF A TARIFF ON DOMESTIC
CONSUMERS
• consumer surplus –the amount a buyer is willing to pay for a good
minus the amount the buyer actually pays for it. Graphically,
consumer surplus is the area below the demand curve and above the
market price line.
• willingness to buy- the maximum amount a buyer is willing to pay for
a good.
THE EFFECT OF A TARIFF ON DOMESTIC
CONSUMERS
THE EFFECT OF A TARIFF ON DOMESTIC
CONSUMERS
By raising the price to $330, the tariff forces consumers who were buying the 1.6 million bikes to
make a decision:
• Some will continue to buy bikes, paying $30 more per bike.
• Some will decide that a bike is not worth $330 to them, so they will not buy at the higher
price.

In Figure 8.3, quantity demanded falls from D 0 to D 1 , a decrease of 0.2 million bikes.
net loss to consumers = shaded area a + b + c + d because consumer surplus declines from triangle
FEC to triangle FGH.
Area a + b 1+c is the loss of $30 per bike of consumer surplus for those who continue to buy bikes at
the higher price.
Area d is the loss of consumer surplus for those who stop buying bikes.
In our example, the consumer surplus loss is $45 million per year
THE TARIFF AS GOVERNMENT REVENUE
• Tariff revenue equals the unit amount of the tariff times the volume
of imports with the tariff.
• In Figure 8.3 the total government revenue from collecting the tariff
is area c , equal to $18 million per year (the tariff of $30 times the
imports of M1 = 0.6 million).
THE NET NATIONAL LOSS OF A TARIFF

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