Guide answers to questions – Chapter 4
Self-assessment questions
1. Using a diagram like Figure 4.7, show the full Foreign welfare effects of imposing a
Home tariff equal to T, i.e. show the impact on Foreign producer
...
Guide answers to questions – Chapter 4
Self-assessment questions
1. Using a diagram like Figure 4.7, show the full Foreign welfare effects of imposing a
Home tariff equal to T, i.e. show the impact on Foreign producers and Foreign
consumers separately.
Answer:
The key new point is that a Home tariff helps foreign consumers and harms foreign
producers since it lowers the foreign internal price. The Welfare effects are summarized
by the right hand side diagram of Figure 4.7. Foreign consumers gain while foreign
producers lose because of the fall in border prices. The net effect is negative.
2. In August 2005, EU clothing retailers such as Sweden’s H&M complained about the
new EU restrictions on imports from China that were imposed after complaints from EU
clothing producers based in Italy, France, Spain, Portugal and Greece. Use a diagram
like Figure 4.8 to explain the positions of the various EU interest groups.
Answer:
The key point is that import restrictions benefit producers while damaging consumers.
Retailers can here be seen as consumers because like them they also have to pay the
higher prices resulting from tariffs.
3. One way to think about the slope of the MS curve is in terms of the ’size’ of the home
nation. The idea is that the demand from a very small nation has a very small impact on
the world price. For example, Switzerland could probably increase its oil imports by 10
per cent without having any impact on the world oil price. Using a diagram like Figure
4.7, show that the welfare costs of imposing an MFN tariff are larger for smaller nations,
interpreting this in terms of the MS curve’s slope. Show that when the MS curve is
perfectly flat, the welfare effects are unambiguously negative.
Answer:
This is the standard, small-nation tariff analysis. The key point is that, facing a flat MS
curve the “L” (cf. Figure 4.7) area vanishes, leaving the country with a welfare change of
–K (instead of the ambiguous L-K). Intuitively this results from the fact that the lower
demand for imported goods does not result in lower prices on the world market so the
tariff’s effect is not mitigated. The government revenue surplus is therefore completely
absorbed by the decrease in consumer surplus.
4. Using a diagram like Figure 4.8, show that a country facing an upward-sloped MS
curve can gain – starting from free trade – from imposing a sufficiently small tariff. (Hint:
Starting from a small tariff, the rectangle gains and triangle losses both increase in size
as the tariff gets bigger, but the rectangle gets bigger faster.) Show that any level of a
frictional or FCR barrier lowers Home welfare
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