ECON 101 Lecture Notes - Lecture 11: Free Trade, Economic Surplus
Free trade and efficiency:
● Free trade ensures efficient allocation of resources
○ MV = MC = Pworld
○ Social surplus is maximized
● Any distortion will result in reduction in economic surplus
○ trade taxes
○ quotas
○ consumption taxes/subsidies
○ production taxes/subsidies
● Trade taxes:
○ trade taxes levy a duty on each unit of the good that crosses the national border
■ provides disincentive to trade
○ Export taxes
○ Tariffs (i.e. import taxes):
● Price Distortions in Trading Environments:
○ Potentially three distinct prices:
■ price for domestic consumers
■ price for domestic producers
■ price for foreign consumers/producers
○ In Simplest situation, domestic policy will have no influence on prices for foreigners
■ domestic market small relatie to the orld
■ foreign producers can always receive Pworld
■ foreign consumers can always buy at Pworld
● Tariffs: Producer and consumer prices
○ The price paid to an importer for an imported good is always PWorld
■ if the importer is offered less, she will sell elsewhere in the world
■ there is no reason to offer her anymore
○ if a tariff of $t is levied, the domestic consumer buying the import must pay (Pworld + t)
for that good
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ECON 101 Full Course Notes
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