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Feenstra Taylor Econ CH08

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  IMPORT TARIFFS AND QUOTAS UNDER PERFECT COMPETITION 1  A Brief History of theWorld Trade Organization 2 The Gains from Trade 3 Import Tariffs for a Small Country 4 Import Tariffs for a Large Country 5 Import Quotas 6 Conclusions 8  Introduction ã During the 2000 presidential campaign, President George W. Bush promised to consider implementing a tariff on the imports of steel. ã This was a political move to secure votes in large steel-producing states as the tariffs would “protect” the domestic producers of steel. ã The steel tariff is an example of a trade policy — a government action meant to influence the amount of international trade.  Introduction ã Because gains from trade are unevenly spread, producers often feel the government should help them limit losses due to competition from trade. ã Trade policy can include the use of import tariffs (taxes on imports), import quotas (limits on imports), and subsidies for exports. ã We will assume that firms are perfectly competitive. They produce a homogeneous good and are small compared to the market.  Firms are price takers  The Gains from Trade ã We will now demonstrate the gains from trade using Home demand and supply curves, together with the concepts of consumer surplus and producer surplus. ã Consumer and Producer Surplus  Figure 8.1 (a) shows the Home demand curve D where consumers face a price of P 1 .  Remember, CS is the difference between the price the consumer is willing to pay and the actual price.  Consumer surplus then is the shaded region between the demand curve and the market price, up to the total quantity purchased, D 1 in this case.
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