Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download 7.-Restrictions-on-f..
Document related concepts
no text concepts found
Transcript
Restrictions on free trade Advantages and disadvantages of free trade Advantages of free trade Disadvantages of free trade • Specialisation leading to increased output • Trade allows economies of scale (larger market to sell to) • Lower price and increased choice • Competition and innovation • Risk – interdependence, overreliance on trade, loss of control • Unemployment (perhaps) • Income inequality • Environmental impact • Culture Welfare Gain From Trade S domestic P domestic P world A B C S world D domestic QS QD domestic domestic Imports Consumer surplus gain = A + B + C Producer surplus loss = A Total welfare gain = B + C Trade Protection Options • Tariffs: taxes on imports • Quotas: quantity restrictions on imports • Subsidies: given to domestic firms to help them compete in foreign markets • Regulations: can make it very difficult or expensive for foreign products to comply Tarrifs • A tax on imported goods (aka import duty/ customs duty) designed to raise the price to the level of, or above the existing domestic price. Tariffs – A Loss of Welfare S domestic P tariff P world A B C S world D D domestic Q S1 Q S2 Q D2 Q D1 free trade with tariff with tariff free trade Lower Imports Consumer surplus reduced by A + B + C + D Producer surplus increased by A (domestic producers expand production at ↑ price) Gov’t tax revenue = C Total loss of welfare = B + D Quotas • A physical limit on the quantity of the good imported. • Increases the share of the market available for domestic producers. Welfare loss from quota Quota amount decided, added to domestic production SD1 Loss in consumer surplus is A+B+C+D Gain in producer surplus is A PW +q PW Who receives C? A B C D SW D QS1 QS2 QD2 QD1 Generally importers, so welfare loss is B+C+D If the government sold licences to import, welfare loss is between B+D and B+C+D So tariffs are better than quotas Subsidies • Can be used to increase exports and reduce imports. • Export subsidies to increase exports and support industries • Subsidies to reduce imports – subsidising firms that compete with imports. Welfare loss from subsidy SD1 New producer surplus is A+B+C+D SD2 SW PW A S PW S Original producer surplus is A C Gain in producer surplus is B+C+D Subsidy costs taxpayers A+B+C+E B E D So loss from subsidy is A+B+C+E minus B+C+D Which is A+E-D D QS1 QS 2 QD1 Since A is the same as D the loss is E Why have trade restrictions? • If countries specialise according to comparative advantage there are major gains from trading • Tariffs, quotas and other restrictions lead to welfare loss, so why do some countries have protectionist policies?
