EC120 Lecture Notes - Lecture 9: Import Quota, Economic Surplus, Price Ceiling
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If price without trade is lower than world price: country becomes an exporter, producer surplus increases, consumer surplus decreases, local producers gain, local consumers lose, total surplus increases. If price without trade is higher than world price: country becomes an importer, producer surplus decreases, consumer surplus increases, local producers lose, local consumers gain, total surplus increases. A tariff is a tax on imported goods. Tariff may increase prices, but imports continue: producer surplus increases, consumer surplus falls, tax revenue is generated. Tariff may eliminate all imports: consumer surplus increases, producer surplus decreases, just as in the no-trade case, even higher tariffs have no consequence, similar to a non-binding price ceiling. Deadweight loss is always two areas (trades that no longer happen). The two areas are not necessarily the same size. An import quota limits imports to a fixed quantity. If the price in a country stayed at the world price, we get some amount of imports.