Lecture 11 - Tariff Equivalence Flashcards
(11 cards)
According to Bhagwati (1965), what is “tariff-quota equivalence” in a perfectly competitive market?
For every quota allowing imports of m1, there is an “equivalent” tariff of p1 – p* that replicates the same outcome
In perfectly competitive markets, how can the welfare impacts of quotas differ from tariffs, even if they are equivalent in terms of price and quantity?
The difference arises from the allocation of “quota rents”
How does free trade impact a domestic monopoly in a small country facing a fixed world price (Pw)?
The domestic monopolist faces the horizontal world price line as its new demand and MR curve.
It produces where MR = Pw = MC, behaving like a perfectly competitive industry and losing its control over price. Consumer surplus increases significantly.
If a small country with a domestic monopoly imposes a specific tariff (t) under free trade, how does this affect the monopolist’s production decision?
The monopolist now faces a new MR curve at Pw + t and produces where MR = Pw + t = MC. Output expands relative to free trade
When comparing a tariff and a quota set to allow the same level of imports (M2) for a domestic monopoly, how do the resulting prices and monopoly outputs compare?
Under the quota, the price is higher (P3 > PW + t), and the monopolist’s output is lower (S3 < S2) compared to the tariff equilibrium
Why are tariffs and quotas not equivalent for a domestic monopoly?
Because under a quota, the monopolist retains pricing power and can charge a higher price than under a tariff, even if import levels are the same.
How do “quota rents” compare to tariff revenue for an equivalent import volume under a domestic monopoly?
Quota rents are higher than the tax revenue would be under a tariff
What happened to the price and quality of Japanese cars imported into the US under the VER?
The average price of imported Japanese cars rose significantly (by $2900 from 1980-1985), with a substantial portion attributed to quota rents earned by Japanese producers ($1100) and quality improvements in Japanese cars ($1650)
How did the US Auto VER affect the price of US-produced cars?
The average price of US cars rose very rapidly (43% from 1979-1981), indicating the exercise of market power by US producers who were sheltered by the quota.
Based on the sources, what is a key takeaway about the effectiveness of Chinese solar panel production spillovers for EU production?
There is no evidence of spillovers from Chinese solar panel production to EU production presented.
What trade-offs does the solar panel case highlight for policies like restricting Chinese EVs?
It clarifies the tradeoff between the price-reducing benefits of foreign entrants (which are good for green transition goals) and the potential political objective of ensuring future domestic industry independence from foreign suppliers
