Protectionism - The effect of import duties

1
The Effect of Import Duties
Price
SDomestic
Sworld Tax
SWorld
DDomestic
QDom
QWorld
Qdom Tax
Qworld Tax
Quantity
2
The Effect of Import Duties
Under autarky (no trade) the domestic market
can be characterised by an ordinary demand and
supply diagram with an equilibrium at Paut
Qaut.
When the market opens up to trade we add a
world market supply curve, Sworld . This curve
is perfectly elastic as no one firm is large
enough to alter the world price (all firms are
price takers).
This results in domestic firms producing
QDom Foreign firms produce QWorld - QDom and the
price falls to the free trade price of PFT. Q
increases by QWorld - QAut and P decreases by
PAut - PFT
Revenue for foreign firms is represented by the
red box. The blue box shows revenue for domestic
firms.
Price
SDomestic
PAut
SWorld
PFT
DDomestic
QAut
QDom
QWorld
Q
3
The Effect of Import Duties

The new tax creates an artificial competitive
advantage for domestic firms who now supply
QDomT Conversely foreign firms face a double
reduction due to the tax reducing total output to
QWorldT and domestic firms increasing market
share.
If an import duty is imposed the world supply
curve shifts up to SworldT. The Price rises to
Pt The value of the tax is equal to the
vertical distance between the 2 curves , Pt PFT.
This results in Decreased revenue for foreign
firms (red box) Increased total revenue for
domestic firms (blue box) New tax revenue for
the government (green box)
Price
SDomestic
SWorldT
Pt
SWorld
PFT
DDomestic
QDom
QWorld
QDomT
QWorldT
Q
4
The Effect of Import Duties
This results in Increased total revenue for
domestic firms which is now equal to the blue
box Decreased revenue for foreign firms (red
box) New tax revenue for the government (green
box)

Important features Reduction in foreign revenue
(blue boxes) Welfare loss due to purchasing from
less efficient UK producers (green box) Welfare
loss from decreased consumption (purple box)
Price
SDomestic
SWorldT
Pt
SWorld
PFT
DDomestic
QDom
QWorld
QDomT
QWorldT
Q