Question

Question 1 : Answer the following in 3-4 sentences

a. What is the deadweight loss in total surplus when a small country switches from free trade to using a tariff?

b.Think about a small country setting a quota on an imported product. What is an equivalent import tariff of the import quota? What is the meaning of quota rents?

c. How do different methods of allocating an import quota affect a country's total surplus compared to using an equivalent import tariff?

d. Please use a three-panel diagram to explain how international price discrimination can create a persistent dumping.

Answer 1

a) When a specific tariff is implemented by a small country it will raise the domestic price by the full value of the tariff. Suppose the price in the importing country rises because of the tariff. In this case the tariff rate would be , equal to the length of the green line segment in the diagram.

B) Certain rate of tariff causes reduction in the quantity by a specified extent and, therefore, it has a quota equivalent. The import quota, on the other hand, while restricting the quantity, causes a rise in import price. It has, therefore, an import tariff equivalent.

Quota rent is the economic rent received by the owner of the imported good that is subject to the quota. To calculate quota rent, first calculate the economic rent, which is the positive difference between the domestic price of the good and the free market price from around the world.

C) Different methods of allocating an import quota are :-

1) First-Come, First-Served -

It affects the country's total surplus as the quota may result in a fluctuating price for the product over the year. During the open period a sufficient amount of imports may flow in to achieve free trade prices. Once the window is closed, prices would revert to the autarky prices.

2) Auction Quota Rights :-

The holder of a quota ticket can buy the product at the low price in the exporter's market and resell it at the higher price in the importer's market. If there are no transportation costs, a quota holder can make a pure profit, called quota rents, equal to the difference in prices. If the government sells the quota tickets at the maximum attainable price, then the government would receive all of the quota rents.

3) 3) Give Away Quota Rights -

The recipient of a quota ticket essentially receives a windfall profit since, in the absence of transportation costs, they can claim the entire quota rent at no cost to themselves. Governments often allocate the quota tickets to domestic importing companies based on past market share.

D) Persistent Dumping is, in general, a situation of international price discrimination where the price of a product which is sold to the importing country is less than the price of the same product when sold in the market of the exporting country. It is generally perceived that dumping would result in unfair trade.

Price discrimination and dumping