Import Tariffs and Quotas Review

This set of flashcards covers key concepts related to import tariffs, quotas, and their effects on market welfare, facilitating exam preparation.

What are import tariffs?

Taxes on imports that governments implement to influence international trade.

What are import quotas?

Limits on the quantity of imports a country will allow.

What is consumer surplus?

The difference between what consumers are willing to pay for a good and what they actually pay.

What is producer surplus?

The difference between what producers are willing to accept for a good and what they actually receive.

What happens to consumer surplus when a country engages in free trade?

Consumer surplus typically increases as consumers benefit from lower prices and a greater variety of goods.

What defines a small open economy?

An economy that is small enough that its demand and supply do not influence world prices and takes prices as given.

How does a tariff impact a small open economy's welfare?

A tariff generally decreases overall welfare due to consumer surplus loss exceeding producer surplus gain and introducing deadweight loss.

What is deadweight loss in the context of tariffs?

The loss of economic efficiency when the equilibrium for a good or service is not achieved or is not achievable.

What is the impact of an import quota compared to a tariff?

Both create welfare losses, but quotas often cause greater losses due to the potential for rent-seeking behavior.

What is the optimal tariff?

The tariff rate that maximizes a large importing country's welfare.

What is the relationship between tariff levels and the elasticity of supply?

With inelastic foreign export supply, higher tariffs generate greater welfare benefits for the importing country.

Why is the optimal tariff for a small open economy zero?

Because the small open economy cannot affect world prices, hence imposing tariffs does not improve welfare.

What are quota rents?

The economic rents that accrue to the holder of a quota, which can be allocated in different ways affecting overall welfare.

What are the four possible ways to allocate quota rents?

1) Quota licenses to home firms without rent-seeking, 2) Quota licenses to firms engaging in rent-seeking, 3) Auctioning quota licenses, 4) Voluntary Export Restraint by the exporting country.

What is the terms of trade?

The ratio of export prices to import prices, reflecting the relative prices of a country’s exports in terms of its imports.

What occurs when a large open economy imposes a tariff that affects world price?

The imposed tariff causes the export supply curve to shift, impacting the prices that both exporters and importers receive.

What is meant by the consumer surplus and producer surplus being represented as welfare?

Both surpluses are indicators of economic welfare as they show the well-being of consumers and producers in the economy.

What is the main reason most economists oppose tariffs?

Tariffs create inefficiencies and deadweight losses that usually outweigh any protective benefits.