Professional Documents
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o Why
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o WTO
o Has a dispute settlement procedure if countries violate
WTO rules.
o Use of tariffs by an importer can easily lead to a response
by exporters and a tariff war
o Effect of the tariff
o (a+b+c+d) fall in consumer surplus
o a rise in producer surplus
o rise in government revenue +(c+e)
o Net effect on home welfare e-(b+d)
o E is the terms-of-trade-gain for the importer
o Foreign export supply
o Tariffs initially increase the importers welfare because of
terms of trade gain exceeds deadweight loss
o If the tariff is too large, the welfare decreases, possibly
back to below the free trade level
o A prohibitive tariff with no imports forced the importers
welfare to be at the no trade level.
o Import quota
o Quota rents are the differences between world price and at
home price (the profit made by importing)
1. Quota licenses given to home firms c. net effect (b+d)
2. Rent seeking produce excess amounts of good to get
import licenses for the following year. This is inefficient
and leads to welfare loss of (b+c+d)
3. Auctioning the quota. Government of the importing country
can auction off quota licenses. Effect is (b+d)
4. Voluntary export restraint- the government of the
importing country to give authority for implementing the
quota to the government of the exporting country.
(b+c+d)
Chapter 8
o Discriminating monopoly- charges a lower price to home than to
firms in its own local market therefor dumping its product into the
home market
o A tariff applied against the foreign discriminating monopoly is called
an antidumping duty
o Infant industry- an industry
o Market power- tariffs and quotas affect the trade equilibrium
differently because of their impact on the homes monopoly market
power (the extent to which a firm can choose its price)
o Tariff- with a tariff the home monopoly will compete against a
large number of importers, limiting market power
o Quota- once quota is reached the monopolist is the only
producer able to sell in the home market.
o Tariffs allow the home firm to raise its price to p+t and net effect of
(b+d)
o Quotas lead to higher prices for home customers since it allows
monopolist to keep market power
o WTO encouraged countries to replace tariffs with quota
o Home tariff
o Foreign monopoly- tariffs causes the foreign firm to
pnew=pold-tariff
Home welfare +(e+d)
o Firms can charge more and differentiate their prices in home
and foreign markets. Price discrimination- firms can choose
how much different groups pay
o Discriminating monopoly- monopolist is able to charge
different prices in the two markets
o Equilibrium condition- for the discriminating monopoly profits
are max MR=MR*=MC*
o Antidumping
o Under the rules of the WTO, an importing country is entitled to
apply an antidumping tariff any time that a foreign firm is
dumping its product.
o An imported product is being dumped if its price is below the
price that the exporter charges in its own local market.
o Sometimes firms raise price to avoid antidumping laws
o Infant industry protection
o a tariff today leads to an increase in Home output that, in
turn, helps the firm learn better production techniques and
reduce costs in the future.
o import protection is potentially justified is when a tariff in one
period leads to an increase in output and reductions in future
costs for other firms in the industry, or even for firms in other
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