ECON 1116 Trade taxes 5 December Levy a duty i e a fee on each unit of the good that crosses the national border o Provide disincentive to trade o Should observe in equilibrium that these taxes reduce trade levels o Also affects incentives to produce consumer domestically Tariffs o Price paid to an importer for an imported good is always P world o If tariff of t is levied the consumer buying the import must pay P world t for that good o If domestic producers charge Less than P world t excess demand for domestically More than P world t excess supply of domestically produced produced goods goods o Tax on imports disincentive to import so imports fall o Consume too little and produce too much o The price that domestic sellers receive rises increase in producer surplus Transfer from consumers o The price that consumers pay rises decrease in consumer surplus o Tariff revenue is collected Revenue tariff imports o DWL says that consumer surplus loss exceeds the gain from producer surplus and tariff revenue Why impose trade taxes o By taxing imports domestic producers face more accommodating market ocnditions Producer surplus increases o Tariffs and other policies designed to deter trade protect domestic producers Accomplished at expense of domestic consumers Lobbying by firms Secure create jobs Infant industry arguments o Also National security self sufficiency arguments Rent seeking motivations Manipulation of world prices o Quota rent is assumed to be some domestic producer o Producer surplus rises Transfer from domestic consumers o Consumer surplus falls by more than producer increase Quota ECON 1116 5 December o Rents accrue to the holders of import licenses License is government issued document authorizing holder to import goods License generally purchased Buy imports at world price Quota holder will accrue some surplus Sell imports at the domestic quota price Domestic trade policy and the world price o Imposing tariff or quota reduces imports o Effectively reduces demand on the world market o If domestic import demand is small relative to the world market we expect no effect on the world price This is the assumption implicit in our analysis so far and will be the assumption in this course o But what if domestic import demand were actually a significant element of world demand Export tax o Price that sellers receive falls Reduction in producer surplus o Price that consumers pay falls Increase in consumer surplus from producer surplus o Export tax revenue is collected Revenue tax exports o Export tax is a tax on trade o Reduces trade in equilibrium o Specifically reduces supply of goods to the world market Make small country assumption that the reduction won t lead A role for government to an increase in world price o Markets allocate resources efficiently o Government intervention in markets reduces efficiency Tax and spending policies often motivated by non efficiency concerns e g rent seeking in the political process o Is there a redistributive role for government Promote equity or other non efficiency related goals in o Is there an efficiency promoting role for government Participate in creation of international trade agreements markets organizations GATT WTO NAFTA Strategic trade policy may be used to influence world prices favorably After allocation of surplus
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