ECON 110 1st Edition Lecture 8Last lecture: we talked about comparative advantage and opportunity cost.Current lecture: we talked about trade restrictions and surplus for consumers and producers.SECTION 6.1 EFFECTS OF TRADE RESTRICTIONS In general, restrictions to free trade will result in a decrease in total output and an increase in selling price. In general, restrictions to free trade in a specific industry hurt consumers. In many cases, the goal of the restrictions is to benefit (or “protect”) producers and workers in the specific industry. We will consider three types of trade restrictions using sugar as an example: 1. An EMBARGO which prohibits foreign firms or nations from exporting sugar to the US 2. A TARIFF which requires foreign firms or countries to pay taxes on their sales of sugar in the US 3. A QUOTA which puts a limit on how much sugar a foreign firm or country can sell in the US. There are many reasons why a country might impose any of these restrictions: political, military, etc. All we will consider here are the economic implications. With all these restrictions, some entities gain and some lose. EFFECTS OF A TRADE EMBARGO A TRADE EMBARGO is a government order that restricts a foreign country from exporting certain goods to the host nation or which restricts a host nation from exporting things to a foreign nation. EFFECTS OF A TARIFF A TARIFF is a tax on an imported good. A tariff will hurt the American consumer by raising prices and decreasing output. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.A tariff will help US sugar producers by increasing prices and increasing the amount purchased from them. EFFECTS OF A QUOTA A QUOTA is a numerical limit on the quantity of a good that can be imported into a country. EXAMPLE 3: QUOTA VS. FREE TRADE A quota will hurt the American consumer by raising prices and decreasing output. A quota will help US sugar producers by increasing prices and increasing the amount purchased from them. SUGAR QUOTA IN 2003 Assume the world price of sugar was $0.08 per pound. With no trade restrictions, sugar would sell in theUS for $0.08 per pound. In the US, a license is needed to import sugar. Thus, the amount of sugar that could be imported was restricted. This is the same as imposing a quota. This quota restricted the potential supply of sugar in the US and caused the price of sugar to increase to $0.21 per pound. In 2003, consumers paid an extra $2.91 billion due to the sugar quota. In the US sugar industry, the number of jobs “saved” was approximately 3,000. Thus, consumers paid an extra $2.91 billion to save 3,000 jobs. The cost per “saved” job was $2.91 billion/3,000 jobs = $970,000 per job!!! Some of the biggest consumers of sugar are candy companies, soft drink manufacturers, dessert makers, etc. Because of the high sugar prices, some US candy companies moved out of the country, eliminating many US jobs. Because of the high sugar prices, prices of many products which use sugar as a main ingredient also increased. This hurt consumers even more. ARGUMENTS USED TO FAVOR TRADE RESTRICTIONS 1. National defense argument2. Infant industry argument Protect emerging industries from foreign competition until the domestic firms get a chance to grow. 3. Antidumping argument Foreign countries sell items below their cost, but this benefits US consumers. 4. Protect American Jobs Invites retaliation from foreign countries which causes trade to decrease SECTION 6.2 CONSUMER SURPLUS AND PRODUCER SURPLUS CONSUMER SURPLUS: difference between the maximum amount that consumers would be willing to pay to purchase a given quantity of output and the amount they actually pay Area UNDER the demand curve and above the selling price PRODUCER SURPLUS: difference between the amount that producers actually receive when they sell a given quantity of output and the minimum amount they would be willing to accept to sell that output Area ABOVE the supply curve and below the selling