ECON 1116 5 DecemberTrade taxes- Levy a duty (i.e., a fee) on each unit of the good that crosses the national bordero Provide disincentive to tradeo Should observe in equilibrium that these taxes reduce trade levelso Also affects incentives to produce/consumer domestically- Tariffso Price paid to an importer for an imported good is always P-worldo If tariff of $t is levied, the consumer buying the import must pay (P-world + t) for that goodo If domestic producers charge Less than P-world + t: excess demand for domestically-produced goods More than P-world + t: excess supply of domestically-producedgoodso Tax on imports—disincentive to import, so imports fallo Consume too little and produce too mucho The price that domestic sellers receive rises—increase in producer surplus Transfer from consumerso The price that consumers pay rises—decrease in consumer surpluso Tariff revenue is collected Revenue = tariff * importso 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 increaseso Tariffs and other policies designed to deter trade “protect” domestic producers Accomplished at expense of domestic consumers Lobbying by firmso Also Secure/create jobs Infant industry arguments National security/self sufficiency arguments Rent-seeking motivations Manipulation of world prices- Quotao Quota rent is assumed to be some domestic producero Producer surplus rises Transfer from domestic consumerso Consumer surplus falls—by more than producer increaseECON 1116 5 Decembero 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 Sell imports at the domestic, quota price Quota holder will accrue some surplus- Domestic trade policy and the world priceo Imposing tariff (or quota) reduces importso Effectively reduces demand on the world marketo 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 courseo But what if domestic import demand were actually a significant element of world demand?- Export taxo Price that sellers receive falls Reduction in producer surpluso Price that consumers pay falls Increase in consumer surplus—from producer surpluso Export tax revenue is collected Revenue = tax * exportso Export tax is a tax on tradeo Reduces trade in equilibriumo Specifically, reduces supply of goods to the world market Make small country assumption that the reduction won’t lead to an increase in world price- A role for government?o Markets allocate resources efficientlyo Government intervention in markets reduces efficiency Tax and spending policies often motivated by non-efficiency concerns, e.g. rent seeking in the political processo Is there a redistributive role for government? Promote equity or other non-efficiency-related goals in marketso Is there an efficiency-promoting role for government? Participate in creation of international trade agreements, organizations- GATT- WTO- NAFTA Strategic trade policy may be used to influence world prices favorably- After allocation of
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