ECON 1 Lecture Notes - Lecture 12: Economic Equilibrium, Smog, Deadweight Loss
Chapter 9: International Trade
- Protectionism: policy of restraining trade through quotas, tariffs, or other regulations which burden
foreign (but not domestic) producers
- Ex: saving jobs through trade restrictions sounds good and is politically rewarding. The problem is that
the productive higher paying jobs that fail to be created are not always as visible as the jobs (saved).
This is one of the fundamental difficulties in debating trade politics. The gains from trade restrictions
are seen and the losses are often not seen
- A tariff has 2 effects:
o Increased domestic production and decreased domestic consumption
▪ More of the good is produced by the higher-cost domestic producers
o Less is consumed → lowers gains from trade
- Imposing a tariff on sugar raises the domestic price from 9
cents/lb. to 20 cents/lb.. Because domestic producers did not
produce sugar at the world price of 9 cents/lb, the tariff
increased producer surplus by the entire area under the
world supply + tariff and above the domestic supply curve.
- With the tariff, consumer surplus is reduced by the
amount of area below the domestic demand curve between
world price and the world price + the tariff .
- Because the loss to consumers is greater than the gain to
producers, there is a net loss to the economy. This loss is
divided into two parts:
- The value of wasted resources resulting from producing
sugar rather than other goods where the resources would be
more productive. These costs are largely unseen and
therefore often left out of the political debate.
- The lost gains from trade is lost consumer surplus resulting
from consumers paying more for sugar. These costs are
visible but spread among millions of consumers. Because the
cost per consumer is small, these costs are not likely to get
much political attention.
- One final cost of protectionism: lobbying
o The loss to domestic consumers is greater than the gains to domestic producers
- Why does congress pass tariffs?
o Smaller number of producers → benefits per producer is high
o Larger number of consumers → loss per consumer is low
- Trade barriers (quotas)
- Import quota: a quantitative limit on imports of a good
o Mostly has the same effects as a tariff
▪ Raises price, reduces quantity of imports
▪ Redues uers’ elfare
▪ Increases sellers’ elfare
o A tariff creates revenue for the government, a quota creates profits for the foreign producers of
the imported goods, who can sell them at higher price
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Document Summary
Protectionism: policy of restraining trade through quotas, tariffs, or other regulations which burden foreign (but not domestic) producers. Ex: saving jobs through trade restrictions sounds good and is politically rewarding. The problem is that the productive higher paying jobs that fail to be created are not always as visible as the jobs (saved). This is one of the fundamental difficulties in debating trade politics. The gains from trade restrictions are seen and the losses are often not seen. Increased domestic production and decreased domestic consumption: more of the good is produced by the higher-cost domestic producers, less is consumed lowers gains from trade. With the tariff, consumer surplus is reduced by the amount of area below the domestic demand curve between world price and the world price + the tariff . Because the loss to consumers is greater than the gain to producers, there is a net loss to the economy.
