Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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?