What Is A Tariff And What Is A Quota In International Trade

10 What Is A Tariff And What Is A Quota In International Trade

What is a tariff and what is a quota in international trade? In Tessland, suppose the domestic demand curve for sugar is given by: P=40 - 0.008Q and the domestic supply curve is given by: P=10 + 0.002Q. i. In the absence of any trade, what is the equilibrium price and quantity of sugar? How much are the consumer surplus and domestic producer surplus? ii. Suppose the equilibrium price of sugar in the world market is P̂ = 12. How much are the new consumer surplus and new domestic producer surplus? iii. Suppose Tessland’s government imposes a tariff of $2 per unit (a ton) of sugar.

Paper For Above instruction

International trade policies such as tariffs and quotas significantly influence domestic markets, affecting prices, consumer and producer surpluses, and overall economic welfare. To understand these impacts thoroughly, particularly in the context of Tessland's sugar market, it is essential to analyze the equilibrium conditions, the effects of open market prices, and the implications of tariff imposition. This essay examines these aspects step-by-step, beginning with the determination of equilibrium in the absence of trade, then evaluating the shifts in surpluses with the world price, and finally assessing the impact of a tariff policy.

Equilibrium in the Absence of Trade

The initial step involves calculating the equilibrium price and quantity of sugar in Tessland without international trade. The demand function is given by P=40 - 0.008Q, and the supply function is P=10 + 0.002Q. Equilibrium occurs where quantity demanded equals quantity supplied, thus setting demand equal to supply:

P_d = P_s

Substituting the demand and supply equations:

40 - 0.008Q = 10 + 0.002Q

Simplifying this equation gives:

40 - 10 = 0.008Q + 0.002Q

30 = 0.01Q

Therefore, the equilibrium quantity (Q*) is:

Q* = 30 / 0.01 = 3000 units

Plugging Q back into either the demand or supply equation to find the equilibrium price (P):

P = 40 - 0.008(3000) = 40 - 24 = 16

The equilibrium price is $16 per unit of sugar, and the equilibrium quantity is 3000 units.

Consumer Surplus and Producer Surplus at Equilibrium

Consumer surplus (CS) is the area of the triangle between the highest price consumers are willing to pay (intercept of demand at Q=0) and the equilibrium price, up to the equilibrium quantity. The intercept of demand is at P=40 when Q=0.

CS = 0.5 (base) (height)

Base = Q* = 3000 units

Height = 40 - 16 = 24

Thus:

CS = 0.5  3000  24 = 36,000

Similarly, the producer surplus (PS) is the area of the triangle between the equilibrium price and the minimum price at which producers are willing to supply (P=10 at Q=0). The PS is based on the difference between the equilibrium price and the supply intercept:

PS = 0.5 Q (P - P_s intercept)

PS = 0.5 3000 (16 - 10) = 0.5 3000 6 = 9,000

Consequently, at equilibrium without trade, consumer surplus is $36,000, and producer surplus is $9,000.

Impacts of World Market Price of $12

If the world market price of sugar is P̂ = 12, which is lower than the domestic equilibrium price of 16, Tessland will import sugar. The domestic market adjusts to this price, leading to shifts in surpluses.

The new consumer surplus at the world price considers the area between the demand curve and P̂ = 12, up to the quantity demanded at that price. The quantity demanded at P=12 is found by substituting into demand:

12 = 40 - 0.008Q
0.008Q = 40 - 12 = 28
Q_demanded = 28 / 0.008 = 3500 units

The domestic supply at this price is obtained similarly:

12 = 10 + 0.002Q
0.002Q = 12 - 10 = 2
Q_supplied = 2 / 0.002 = 1000 units

Since domestic producers only supply 1000 units at this price but consumers demand 3500 units, Tessland will import the difference (3500 - 1000 = 2500 units).

New Consumer Surplus

The maximum consumers are willing to pay is $40 (from the demand intercept). The consumer surplus is the area of the triangle between this maximum price and the world price at the quantity demanded:

CS = 0.5  (Q demanded)  (P intercept - P̂)
CS = 0.5  3500  (40 - 12) = 0.5  3500  28 = 49,000

This increase in consumer surplus reflects the benefit consumers gain due to lower prices from international markets.

New Domestic Producer Surplus

Producers now only supply 1000 units at the market price of $12. The minimum supply price at Q=0 is $10, and the supply curve intercept at Q=0 is at P=10.

The producer surplus is the area between supply curve and the price, up to the quantity supplied:

PS = 0.5  Q supplied  (P̂ - P supply intercept)
PS = 0.5  1000  (12 - 10) = 0.5  1000  2 = 1,000

Compared to the initial scenario, domestic producer surplus has decreased because domestic producers now only sell 1000 units at a lower price.

Imposition of a $2 Tariff

When the government imposes a tariff of $2 per unit, the effective price for imports rises from $12 to $14. This action alters the market equilibrium again, affecting imports, consumer surplus, and producer surplus.

At the new effective price (world price + tariff = $14), the quantity demanded is:

14 = 40 - 0.008Q
0.008Q = 40 - 14 = 26
Q demanded = 26 / 0.008 = 3250 units

The quantity supplied domestically at $14 is:

14 = 10 + 0.002Q
0.002Q = 14 - 10 = 4
Q supplied = 4 / 0.002 = 2000 units

Domestic production increases to 2000 units, while imports decrease to 1250 units (3250 - 2000). The tariff raises the domestic price, providing some benefit to domestic producers but harming consumers with higher prices and reduced consumer surplus.

Consumer Surplus with Tariff

The new consumer surplus considers the maximum willingness to pay ($40) and the new price ($14):

CS = 0.5  3250  (40 - 14) = 0.5  3250  26 = 42,250

The consumer surplus decreases compared to the free trade scenario at $12, reflecting reduced consumer benefits due to higher prices.

Domestic Producer Surplus with Tariff

The domestic producer surplus increases because producers sell 2000 units at $14:

PS = 0.5  2000  (14 - 10) = 0.5  2000  4 = 4,000

Even though domestic producers earn more per unit than in the no-tariff scenario, overall surplus is affected by reduced imports and higher domestic prices.

Conclusion

Trade policies such as tariffs influence domestic markets by altering the equilibrium price, quantity, and the distribution of consumer and producer surpluses. While tariffs can benefit domestic producers by raising prices, they often harm consumers through higher prices and reduced surplus. In Tessland's sugar market, the imposition of a tariff decreases consumer surplus significantly but benefits domestic producers. Policymakers must balance these trade-offs to maximize overall economic welfare while considering political and social factors. Ultimately, understanding the dynamic effects of trade barriers assists countries in designing policies that align with their economic objectives and global trade commitments.

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