Question

1. Compare and contrast two discussed trade barriers, tariffs, or quotas.
2. What is “dumping,” and who determines when dumping has taken place?
3. What is the difference between global quotas and selective quotas?
4. Why would a country set an export quota?

Answer 1

1) Effect of Import Tariff;

Import tariff increases price of a good in importing country and it reduces it for exporting country. As a result of these price changes, consumers loose in importing country and consumers gain in exporting. On the other hand, producers gain in importing country and looses in exporting country. In addition, government imposing tariff gains revenue to compare these cost and benefit it is necessary to quantify benefits depends on concept of consumer and producer surplus.

Consumer surplus is the area below the demand curve and above price. It measures difference between willingness to pay and actual payment. On the other hand, P.S is the area below price and above supply curve. It measures difference between price received by seller and cost to seller.

As shown in the diagram, when tariff is imposed by home country on its import then price increases in importing country. As a result, there is loss of consumer surplus and it is equal to area (a + b + c + d). On the other hand, producer surplus increases by area "a". The tax revenue for government which is product of size of tariff and import after tariff is measured by area (c + e). Therefore, in the net cost of tariff is (- b - d). As shown in diagram there are 2 triangles which measures loss to country. The loss of area "b" and "d" are efficiency loss specifically area "b" is the production efficiency loss and area "d" is consumption efficiency loss.

Import Quota:

An import quota is direct restriction on quantity of some good that may be imported. The restriction is usually imposed by issuing license to some group of individual or firm. Generally, it is perceived that import quota limit imports without increasing domestic price. But we find that import quota always increases domestic price of imported goods. When imports are limited then the immediate result is that at initial price demand exceeds domestic supply plus imports. As a result, domestic price increases. Due to increase in domestic price consumer surplus decreases by area (a + b + c + d + e). However, due to increase in price producer surplus of domestic producer increases by area "a". In addition there is quota rent of area (c + d) which is earned by license holder because they are importing goods at price Pw and selling domestically at a higher price. Therefore, import tariff where government gets revenue, in this case license holder gets quota rent.