International Trade: Tariffs, Quotas, and Market Effects

If Pw > Pa →

EXPORTS.

Who Benefits from Imports

domestic consumers benefit and domestic producers lose.

Who Benefits from Exports

domestic producers benefit and domestic consumers lose.

Common Mistake: No Trade

when Pw = Pa.

Tariff Definition

A tax on imported goods.

Tariff Effect on Domestic Price

A tariff raises the domestic price above the world price.

Who Gains from a Tariff

Domestic producers and the government gain

Who Loses from a Tariff

Domestic consumers lose from a tariff.

Tariff and Government Revenue

Tariffs ALWAYS generate government revenue.

Tariff and Total Surplus

Tariffs reduce total surplus and create deadweight loss.

Deadweight Loss from a Tariff

Deadweight loss represents lost gains from trade (not a transfer to anyone).

Quota Definition

A legal limit on the quantity of a good that can be imported.

Quota and Government Revenue

Quotas do NOT generate government revenue.

Quota Rents

go to whoever holds the import licenses (not consumers, not necessarily producers, not the government).

Deadweight Loss on Trade Graph

Deadweight loss appears as the two small triangles on a tariff or quota graph.

Transfer vs Deadweight Loss

one moves surplus between groups. other disappears entirely.

If Pw < Pa

IMPORTS.