The Small-Country Case

In Figure 1, we show Country A's domestic demand (D) and supply (S) curves for a particular commodity, say, oats. If trade is free, oats will be imported into Country A at the prevailing world price, Pw At that price, Country A's total consumption will be OQ₄, its production will be OQ₁ and imports will make up the difference, Q₁ Q₄. Total supply (OQ₁ of domestic output plus Q₁Q₄ of imports) equals total demand (OQ₄) at that price.

Now suppose that Country A imposes a tariff, equal to T per bushel, on imports of oats. The immediate result of the tariff is that the price of oats in Country A will rise by the amount of the tariff, to Pt. (Herewe assume that the world price of oats remains unchanged when Country A imposes its tariff. That is, we assume that Country A is a small country whose actions will not affect the world market. We will relax this assumption later.) The increase in price has a number of effects that can conveniently be examined with the aid of Figure 1.

Quantity of oats

FIGURE 1 The effects of a tariff, partial equilibrium, small-country case.

The first effect is that the consumption of oats is reduced from OQ₄ to OQ₃. The second effect is that domestic output rises from OQ₁ to OQ₂. Domestic producers

do not pay the import tariff, of course, and the higher domestic price induces them to increase their output, as indicated by the supply curve. The third effect is that imports fall from O₁Q₄ to O₂Q₃. Both the fall in consumption and the rise in production cut into the previous level of imports of oats. (Note that if the tariff were large enough to raise the price to Pw, imports would fall to zero. Domestic producers would supply the entire demand. This would be a prohibitive tariff.)

We can also use Figure 1 to show the welfare gains and losses that result from the tariff. To show these gains and losses, we must recall that the area under the demand curve can be interpreted as a measure of the total welfare consumers obtain from consumption of the commodity. Part of this benefit must be paid for in the form of the price of the commodity, leaving a "consumer surplus" in the triangular area under the demand curve and above the horizontal line at the going price level. Conceptually, this is a benefit to consumers and does not have to be paid for in the commodity price. For example, in Figure 1, consumer surplus under free trade is the area of the triangle Pw KN, equal to the total area under the demand curve OKNQ₄, minus the rectangle OpwNQ₄.'

Imposition of the tariff reduces the consumer surplus to PtKM, a reduction equal to the quadrilateral area PwPtMN. Some of this loss in consumer surplus is recouped by other segments of the economy, however. Area a accrues to domestic producersof oats as a kind of producer surplus.[1] Domestic producers receive the new price pj for all the oats they produce, including the original output, OQ ₁, that they had been willing to produce at the lower price, Pw. Thus they receive a windfall gain, or economic rent, on this output Area a therefore represents a transfer from consumers to producers of this portion of consumer surplus Similarly, area c represents the tariff revenue that accrues to government. The tariff revenue is equal to the tariff, T, times the imports on which the tariff is collected, Q₂Q ₃. It is a transfer from consumers to government.

From a national point of view, therefore, areas a and c are not net losses they are transfers from consumers to producers and to government, respectively. But the situation is different for the remaining pieces of the decreased consumer surplus Areas b and d are lost to consumers, but they are not gained by any other sector. These areas therefore represent the net welfare loss resulting from the tariff, sometimes called the deadweight loss. Area h can be thought of as a loss resulting from inefficiency, as resources are drawn into oats production and paid higher returns than would be needed to obtain oats through free trade. Similarly, area d is the benefit consumers derive from the opportunity to consume the additional quantity, Q₃Q ₄, at the world price, Pw. Consumers lose this benefit when a tariff is imposed because price rises to Pt.

Efforts have been made to estimate the amount of the deadweight loss for particular tariffs. If the demand and supply curves are approximately straight lines in the relevant range, then the deadweight loss is approximately equal to the reduction in imports times one-half the tariff[2]. Even if the deadweight loss were very small, consumers or other groups within an economy might strongly oppose a tariff. As we have seen, the loss in consumer surplus is the sum of areas a + b + c + d. It is small comfort to consumers to know that most of this loss is transferred to producers and to government On the other hand, producers have reason to favor a tariff despite the fact that it inflicts a deadweight loss on the economy as a whole. This conflict of interest between consumers and producers is a common feature of the debate over tariff policy In weighing the pros and cons of tariffs on particular products, one must evaluate the effects on consumers and producers and reach a judgment about where the balance lies. Political factors often play a prominent role in these debates.

This partial equilibrium analysis is extremely simple. Despite the many as assumptions on which it rests, it is very powerful, and it yields some very strong and significant results. Before leaving the small-country case, we can modify our example to explain the effects of alternative techniques of intervention.

Дата добавления: 2015-11-14