Quotas and Tariffs: Graphing and Analysis
The following problems ask you to draw graphs illustrating trade barriers for "special cases." They require you to think about what is going on, rather than just reproduce results from memory. In each case, label the initial world price with free trade "PW", the price in the U.S. after the policy is introduced "P2". For the large country cases, also identify the price paid by consumers in the ROW "P3". Also, identify areas in your graphs and answers questions about gains and losses by identifying them as sums of different areas.
1. The U.S. is a small country in the world market for widgets. Moreover, the U.S. cannot produce any widgets at all domestically. Illustrate the impact of a U.S. tariff on widgets, and identify the change in U.S. welfare from this tariff (state whether it's a welfare gain or welfare loss).
2. The U.S. is a large country in the world market for coffee beans. Assume the U.S. cannot produce any coffee beans domestically. Illustrate the impact of a U.S. tariff on coffee beans, and identify areas that represent the change in welfare for the U.S. and for the ROW from the tariff. Can the U.S. ever come out ahead from this tariff? Why or why not? Can the ROW ever come out ahead? Why or why not?
3. The U.S. is a large country in the world market for golf carts. While the U.S. produces and consumes golf carts, the rest of the world produces them, but does not use them. Illustrate the impact of a U.S. quota on golf carts that cuts imports roughly in half. (Assume the U.S. government auctions off import licenses to the highest bidder among U.S. import companies.) Identify areas that represent the change in welfare for the U.S. and for the ROW from the quota. Can the U.S. ever come out ahead from this quota? Why or why not? Can the ROW ever come out ahead? Why or why not?