Free Trade and Protectionism: Tariffs and Subsidies

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Free Trade and ProtectionismTariffs and
Subsidies

• Section 4.2

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Tariffs

• Tariffs are taxes on goods imported into a
  country. They are a form of protectionism and are
  often used to try and reduce the level of imports
  into a country.
• Ad valorem i.e. percentage of import price
• Specific i.e. so much per unit
• Cost include lose to society and hostility of
  trading partners

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Stage 1Closed Economy
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Stage 2 Open to Trade
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Stage 2 Open to Trade
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Stage 3 Tariff imposed
Inefficient Domestic Producers can now enter the
market
P
World Tariff
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Stage 1 Closed Economy
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Stage 2 Open to Trade
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Stage 3 Tariffs and Impact on Consumer and
Producer Surplus
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Tariffs and Impact on Consumer and Producer
Surplus
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Quotas

• A limit on the amount that can be imported
• Results in loss to domestic consumers, gain for
  domestic producers and a windfall profit to some
  overseas suppliers
• No direct financial cost to government but will
  result in hostility from trading partners

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Quotas Stage 1
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Quotas Stage 2
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Subsidy

• Any action by the government to lower the ratio
  of domestic prices to import prices.
• Usual forms include direct payments or indirect
  payments in the form of tax breaks and low
  interest loans.
• There effect is to shift the domestic supply
  curve to the right so firms are more competitive
  to overseas firms
• Cost include the opportunity cost of government
  spending and hostility of trading partners.

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Subsidy Stage 1
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Subsidy Stage 2