The Costs of Protectionism

  • Ex: the US gov. Greatly restricts the amount of sugar that can be imported into the US

    • As a result, US consumers typically pay 50% to 100% more for sugar than the world price
    • Two assumptions:

    1. The tariff is so high that it eliminates all sugar imports

      1. Even though a small amount of sugar is allowed into the US at a low tariff rate, anything above this small amount is taxed so heavily that no other imports happen

    2. If we had complete free trade, all sugar would be imported

  • A tariff has two effects: increases domestic production and reduces domestic consumption

    • Each of these has a cost
    • The increase in domestic production is good for domestic producers, but domestic producers have higher costs of production than foreign producers
    • The tariff means that sugar is no longer supplied by the lowest-cost sellers, and resources that could've been used to produce other goods and services are instead wasted producing sugar
    • Due to higher costs, the price of sugar rises and fewer people buy sugar, reducing the gains from trade

  • Ex: sugar costs more to grow in the US than in Brazil because the climate in the US mainland if not good for sugar growing and because land and labor in Florida have many alternative uses that are high in value

    • Sugar farmers in Florida have to douse their land with expensive fertilizers to increase production which in the process create environmental damage
    • The excess resources (fertilizer, land, labor) that go into producing sugar in the US could have been used to produce other goods like oranges and theme parks

  • Supply curve tells us the cost of production so that at the equilibrium price, the cost of producing an additional pound of sugar in the US is 20 cents

    • That same pound of sugar could be bought in the world market for 9 cents
    • so the tariff causes 11 cents worth of resources to be wasted in producing that last pound of sugar

  • Another cost to a tariff:

    • Demand curve tells us the value of a good to demanders, so at the equilibrium price demanders are willing to pay up to 20 cents for a pound of sugar
    • World suppliers are willing to sell sugar at 9 cents per pound
    • US consumers and world suppliers could make mutually profitable gains from trade, but they are prevented from doing so by the threat of punishment
    • The value of the lost gains from trade is given by the pink area (area C)
    • Calculate by using area of a triangle [(20-9) cents per pound x 4 billion pounds divided by 2 = 22 billion cents or $0.22 billion
    • Total cost of the sugar tariff to US citizens is $1.1 billion of wasted resources plus $0.22 billion of lost gains from trade for a total loss of $1.32 billion

  • 3 conditions that explain why a free market is efficient:

    1. The supply of goods is bought by the buyers with the highest willingness to pay
    2. The supply of goods is sold by the sellers with the lowest costs
    3. Between buyers and sellers, there are no unexploited gains from trade or any wasteful trades

  • A tariff reduces efficiency because the supply of goods is no longer sold by the sellers with the lowest costs, and with a tariff, there are unexploited gains from trade between buyers and sellers