Chapter 8Consumer SurplusProducer SurplusExercisesCosts and Benefits of TariffsSlide 6The Effects of a Tariff in a Small CountryNontariff BarriersQuotasEquivalence of tariffs and quotasExport SubsidiesEffects of an export subsidyExport SubsidyExport Subsidy in EuropeExport subsidy in a small countryNominal and Effective Rates of ProtectionSlide 17Chapter 8Supplementary NotesConsumer SurplusProducer SurplusExercises •Consumer surplus and producer surplus in autarky•Changes in CS and PS –In the case of a importer–In the case of an exporter•Importing is a losing business?Costs and Benefits of TariffsCosts and Benefits of TariffsThe Effects of a Tariff in a Small Country1. Quotas2. Export subsidies3. Government procurement policies4. Health and safety standards5. Domestic contents requirement6. Anti-dumping and countervailing duties Nontariff BarriersQuotas•Government-imposed limits on the quantity or value of imports or exports•Quotas are usually allocated on the basis of licenses. •Include voluntary export restraints (VER).Equivalence of tariffs and quotasEquivalence: •Changes in domestic price, consumption, production, imports, CS and PS are all identical.•If licenses are sold, they generate revenue equal to the tariff revenue.Nonequivalence:•The quantity restriction through quotas provides the domestic producer a monopoly power.•Quotas generate quota rents (area c) and rent-seeking activity.Export Subsidies•An export subsidy is a direct or indirect payment from a country’s government to its export industries.•Various forms of export subsidies–tax rebates–subsidized loans–insurance guarantees–government funding of research and development–direct grants, etc.•Should be distinguished from production subsidies.•Export subsidies are outlawed by the GATTEffects of an export subsidy1. Producers receive more for their products when exported. They divert from the home market to foreign market. Domestic price rises.2. Domestic production increases.3. Domestic consumption declines.4. Exports increase.5. If the country is large, the international price may fall.6. Consumers lose, producers (exporters) gain, government loses. The country as a whole loses for sure. A large country loses more.7. Meanwhile, foreign consumers (or importers) gain.Export SubsidyExport Subsidy in EuropeExport subsidy in a small countryNominal and Effective Rates of Protection Value Added = value of output - value of inputsVA = value added under free tradeVA' = value added with tariffsNRP = t / PERP = (VA' - VA) / VAExampleFree trade: P of a suit (output) = $150P of textiles (imported input) = $100VA = $501) Tariff on imported suits: 20% or $30 per unitNRP on suits = 0.20VA' = 180 - 100 = 80ERP on suits = (80 - 50) / 50 = 0.602) Tariff on imported textiles: 10%NRP on suits = 0.0VA' = 150 - 110 = 40ERP on suits = (40 - 50) / 50 = - 0.20 (Negative protection!)Protection of inputs is a negative protection on