Tariffs and their welfare effects
Classic protection.
Tariff = tax on imports. Imposed by domestic government.
Effect on domestic market (assume small country, world price fixed):
Before tariff: world price Pw lies below domestic equilibrium → imports fill the gap.
After tariff t: imports cost Pw + t domestically.
- Domestic price rises from Pw to Pw + t.
- Domestic production rises (S extends).
- Domestic consumption falls (D contracts).
- Imports fall (smaller gap between Qd and Qs).
Welfare effects:
- Consumer surplus FALLS (higher price, lower Q).
- Producer surplus RISES (higher price covers higher costs).
- Government revenue = tariff × import quantity.
- DEADWEIGHT LOSS = welfare lost — production inefficiency triangle + consumption distortion triangle.
Quota = quantity limit on imports.
Effect almost identical to a tariff in price and quantity terms:
- Domestic price rises.
- Domestic supply rises, demand falls.
- Imports limited.
KEY DIFFERENCE: instead of government revenue, foreign producers (or quota-holding importers) capture the rent (price above world price × quota quantity).
Subsidy to domestic producers. Government pays producers per unit produced.
- Domestic supply shifts RIGHT.
- Domestic production rises; domestic price falls.
- Imports decline.
- Government bears cost.
- No revenue gain; consumers gain from lower prices; producers gain from subsidy.
Administrative / technical barriers.
- Health and safety standards.
- Environmental rules.
- Labelling, certification.
- Paperwork requirements.
- Some are LEGITIMATE (genuine consumer/safety concerns); some are DISGUISED PROTECTION.
- Tariff: tax on imports; raises price.
- Welfare: CS↓, PS↑, gov revenue, DWL.
- Quota: similar but no revenue (foreign rent).
- Subsidy: cheaper domestic, government cost.
- Admin barriers: legitimate or disguised.