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428 CHAPTER 10 COMPETITIVE MARKETS: APPLICATIONS

Domestic supply

Price (dollars per ton) F E

P
w
A I H J
B C
P – S
w
G
Domestic demand
Q 1 Q 2 Q 3 Q 4
Quantity (millions of tons per year)

Free Trade
( with no dumping) With Dumping Impact of Dumping
C onsumer surplus E + F A + B + C + E + F + H + I A + B + C + H + I

Domestic producer surplus A + G + I G –A – I
Net benefits (domestic) A + E + F + G + I A + B + C + E + F + B + C + H
(c onsumer surplus + G + H + I
producer surplus)

Impact on foreign
g ov ernment budget zero –B – C – H – I – J –B – C – H – I – J

FIGURE 10.17 Impact of Dumping
With free trade (no dumping), Q 3 million tons of steel would be consumed in the domestic
market, selling at the world price P w , with Q 2 million tons supplied domestically and Q 3 Q 2
million tons imported. With dumping, domestic consumption would rise to Q 4 million tons
and the price would fall to P w S, with only Q 1 million tons supplied domestically and with
imports increasing to Q 4 Q 1 million tons. Domestically, dumping would increase consumer
surplus, decrease producer surplus, and increase net benefits. The increase in net benefit
partly reflects the subsidy that the foreign government is paying to its producers.

LEARNING-BY-DOING EXERCISE 10.6
S
E D
Effects of an Import Tariff
The domestic demand for DVD players is be freely imported at the world price of $20. The gov-
d
given by Q 100 P , and the domestic supply is ernment is planning to impose a tariff of $10 per unit on
s
d
s
given by Q P where Q and Q measure quantities in imported DVD players.
thousands of DVD players. DVD players can currently