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Taxes, Subsidies - International Economics - Lecture Slides, Slides of Economics

Topics include in International Economics trade theory, tariffs and other protectionist policies, trade agreements between nations, the World Trade Organization, balance of payments, exchange rates, and the European Monetary Union. Key points for this lecture are: Taxes, Subsidies, Tariffs, Effects of a Tariff, Effects of a Tariff on Prices and Quantities, Welfare Under Free Trade, Consumer Surplus, Producer Surplus, Government's Revenue from Tariff, Production Subsidy, Consumption Tax

Typology: Slides

2012/2013

Uploaded on 09/30/2013

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“Small” Country
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Download Taxes, Subsidies - International Economics - Lecture Slides and more Slides Economics in PDF only on Docsity!

Taxes, Subsidies, and Tariffs:

“Small” Country

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The Effects of a Tariff

• A tariff is a tax on imported goods

• Tariffs raise the price of imported goods above

the world price by the amount of the tariff.

• This

– Reduces consumption, …

– Increases production, and thereby …

– Reduces the amount imported

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Price

of Steel

0 Quantity

of Steel

Domestic

supply

Domestic

demand

Imports

under free trade

Equilibrium

without trade

Price

before tariff

World

price

Q

S

Q

D

Producer

surplus

before tariff

Consumer surplus

before tariff

Welfare under free trade

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A
B

Price

of Steel

0 Quantity

of Steel

Domestic

supply

Domestic

demand

Price

after tariff Tariff

Imports

under free trade

Equilibrium

without trade

Price

before tariff

World

price Imports

with tariff

Q

S

Q

S

Q

D

Q

D

Consumer surplus

after tariff

Consumer Surplus after Tariff

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E

Price

of Steel

0 Quantity

of Steel

Domestic

supply

Domestic

demand

Price

after tariff Tariff

Imports

under free trade

Price

before tariff

World

price

Q

S

Imports

after tariff

Q

S

Q

D

Q

D

Tariff Revenue

Government’s Revenue from Tariff

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Effects of Tariff on Social Welfare

C
G
A
D E F
B

Price

of Steel

0 Quantity

of Steel

Domestic

supply

Domestic

demand

Price

with tariff Tariff

Imports

without tariff

Price

without tariff

World

price Imports

after tariff

Q

S

Q

S

Q

D

Q

D

Deadweight Loss

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Tariffs are “third best”

• The tariff can be thought of as the

combination of a production subsidy and a

consumption tax

• The only rationale for a tariff is that it helps

producers

• But even that goal can be better achieved by

using only a production subsidy

• That way, the bad effects of the consumption

tax can be avoided

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CONSUMPTION TAX

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Price

of Steel

0 Quantity

of Steel

Consumption Tax

Imports

under free trade

Imports

after tax

= Q

S

Q

D

Consumption Tax

Purchase price

before tax

D
C
G
A
E F
B

Domestic

demand

Purchase price

after tax

Q

D

World

price

Domestic

supply

Equilibrium

without trade

Deadweight loss of

the consumption tax

Free Trade Consumption Tax

Consumers’ Surplus ABCDEF AB

Producers’ Surplus G G

Government CDE

Total Surplus ABCDE F G ABCDEG

Q

S

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Consumption Tax

Free Trade Consumption Tax

Consumers’

Surplus

ABCDEF AB

Producers’

Surplus

G G

Government CDE

Total Surplus ABCDE F G ABCDEG

The deadweight loss of the consumption tax is F ,

less than D + F , the deadweight loss of the tariff.

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PRODUCTION SUBSIDY

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Price

of Steel

0 Quantity

of Steel

Domestic

supply

Domestic

demand

Production Subsidy

Imports

under free trade

World Price

Imports

after subsidy

Q

S

Q

S

Q

D

Q

D

Production Subsidy

Price sellers get

after subsidy

Price sellers get

before subsidy

price buyers pay, with

or without the subsidy

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Production Subsidy

Free Trade Production

Subsidy

Consumers’

Surplus

ABCDEF ABCDEF

Producers’

Surplus

G CG

Government -CD

Total Surplus ABC D EFG ABCEFG

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Production Subsidy

• When a small country gives a subsidy to

domestic producers of an imported good

– Consumers are unaffected

– Producers gain (C), same as under the tariff

– Taxpayers have to pay for the subsidy (CD)

– Overall, the country is worse off (D).

– Recall that under the tariff, the country suffered

even more (DF)

– Tariffs are “third best”

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