Page 778 - Economics

CONFIRMING PAGES

CHAPTER 35
687
International Trade
and expanded sales; this explains why domestic DVD players in excess of bc units. In other words, an im-
producers lobby for protective tariffs. But from a port quota of bc players is imposed on Japan. We deliber-
social point of view, the greater domestic production ately chose the size of this quota to be the same amount as
from a to b means that the tariff permits domestic imports would be under a P P t tariff so that we can com-
w
producers of players to bid resources away from pare “equivalent” situations. As a consequence of the
other, more efficient, U.S. industries. quota, the supply of players is S Q in the United States.
d
• Decline in imports Japanese producers are hurt. This supply consists of the domestic supply plus the fixed
Although the sales price of each player is higher by amount bc ( Q ) that importers will provide at each do-
P P , that amount accrues to the U.S. government, mestic price. The supply curve S Q does not extend
d
w t
not to Japanese producers. The after-tariff world below price P , because Japanese producers would not ex-
w
price, or the per-unit revenue to Japanese producers, port players to the United States at any price below P ;
w
remains at P , but the volume of U.S. imports instead, they would sell them to other countries at the
w
(Japanese exports) falls from ad to bc . world market price of P .
w
• Tariff revenue The brown rectangle represents the Most of the economic results are the same as those
amount of revenue the tariff yields. Total revenue with a tariff. Prices of DVD players are higher ( P instead
t
from the tariff is determined by multiplying the tariff, of P w ) because imports have been reduced from ad to bc .
P per unit, by the number of players imported, bc . Domestic consumption of DVD players is down from d
P w t
This tariff revenue is a transfer of income from to c . U.S. producers enjoy both a higher price ( P t rather
consumers to government and does not represent any than P ) and increased sales ( b rather than a ).
w
net change in the nation’s economic well-being. The The difference is that the price increase of P P paid
w t
result is that government gains this portion of what by U.S. consumers on imports of bc —the brown area—no
consumers lose by paying more for DVD players. longer goes to the U.S. Treasury as tariff (tax) revenue but
flows to the Japanese firms that have acquired the rights to
Indirect Effect Tariffs have a subtle effect beyond sell DVD players in the United States. For consumers in
what our supply and demand diagram can show. Because the United States, a tariff produces a better economic out-
Japan sells fewer DVD players in the United States, it come than a quota, other things being the same. A tariff
earns fewer dollars and so must buy fewer U.S. exports. generates government revenue that can be used to cut
U.S. export industries must then cut production and re- other taxes or to finance public goods and services that
lease resources. These are highly efficient industries, as we benefit the United States. In contrast, the higher price
know from their comparative advantage and their ability created by quotas results in additional revenue for foreign
to sell goods in world markets. producers. (Key Question 7)
Tariffs directly promote the expansion of inefficient
industries that do not have a comparative advantage; they Net Costs of Tariffs and Quotas
also indirectly cause the contraction of relatively efficient Figure 35.6 shows that tariffs and quotas impose costs on
industries that do have a comparative advantage. Put domestic consumers but provide gains to domestic pro-
bluntly, tariffs cause resources to be shifted in the wrong ducers and, in the case of tariffs, revenue to the Federal
direction—and that is not surprising. We know that spe- government. The consumer costs of trade restrictions are
cialization and world trade lead to more efficient use of calculated by determining the effect the restrictions have
world resources and greater world output. But protective on consumer prices. Protection raises the price of a prod-
tariffs reduce world trade. Therefore, tariffs also reduce uct in three ways: (1) The price of the imported product
efficiency and the world’s real output. goes up; (2) the higher price of imports causes some con-
sumers to shift their purchases to higher-priced domesti-
Economic Impact of Quotas cally produced goods; and (3) the prices of domestically
We noted earlier that an import quota is a legal limit placed produced goods rise because import competition has de-
on the amount of some product that can be imported in a clined.
given year. Quotas have the same economic impact as a tar- Study after study finds that the costs to consumers sub-
iff, with one big difference: While tariffs generate revenue stantially exceed the gains to producers and government. A
for the domestic government, a quota transfers that revenue sizable net cost or efficiency loss to society arises from trade
to foreign producers. protection. Furthermore, industries employ large amounts
Suppose in Figure 35.6 that, instead of imposing a of economic resources to influence Congress to pass and
tariff, the United States prohibits any imports of Japanese retain protectionist laws. Because these rent-seeking efforts

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