9 Import Tariffs and Quotas Under Imperfect Competition
1.
Figures A, B, and C are taken from a paper by Chad Bown: “The Pattern of
Anti
dumping and Other Types of Contingent Protection” (World Bank, PREM Notes
No. 144, October 21, 2009), and updated from Chad Brown, 2012, “Global Anti–
dumping Database,” available at
www.brandeis.edu/~cbown/global_ad/.
a. Figure A shows the number of newly initiated trade remedy investigations
including safeguard (SF), and China safeguard (CSF), antidumping (AD), and
countervailing duty (CVD) (a countervailing duty is used when foreign firms
receive a subsidy from their government, and then the CVD prevents them from
charging lower prices in the importing country). Each bar shows the number of
new cases in each quarter of the year (Q1, Q2, etc.) for 2007 through Q1 of 2012.
The number of cases is graphed separately for developing countries and
developed countries. What does this graph tell us about what has happened to the
number of such cases since 2007? What might have caused this pattern?
Answer: From the second quarter of 2007 onward the number of newly initiated
trade remedy investigations increased nearly every quarter. The number reaches
b. Figure B shows the number of safeguard (SF) tariff initiations by WTO members.
Since 1995 what three years saw the largest numbers of safeguards? What might
explain these increases? (Hint: consider the U.S. business cycle over these years.)
Answer: The three years that saw the largest number of safeguard tariff initiations
in a recession in both the early 2000s and again in 2009.
c. According to Figure B, year 2002 had the most safeguards actions by WTO
members. How many actions were started that year, and what U.S. safeguard case
that year was discussed in this chapter?
d. Figure C shows the number of newly initiated antidumping (AD) investigations,
for quarters of the year from 2007 through Q1 of 2012. Compare the number of
cases in this graph with Figure A, which included safeguard (SF), China
safeguard (CSF), antidumping (AD), and countervailing duty (CVD). What can
you conclude about the total number of SF, CSF, and CVD cases as compared to
the number of AD cases?
Answer: As we can see from Figures A and C, the majority of the safeguard
2. Figure 9-1 shows the Home no-trade equilibrium under perfect competition (with the
price PC) and under monopoly (with the price PM). In this problem, we compare the
welfare of Home consumers in these two situations.
a. Under perfect competition, with the price PC, label the triangle of consumer
surplus and the triangle of producer surplus. Outline the area of total Home
surplus (the sum of consumer surplus and producer surplus).
Answer: Refer to Figure 9-1: Consumer surplus is the area under the demand
b. Under monopoly, with the price PM, label the consumer surplus triangle.
c. Producer surplus is the same as the profits earned by the monopolist. To measure
this, label the point in Figure 9-1 where the MR curve intersects MC at point B
′
.
For selling the units between zero and QM, marginal costs rise along the MC
curve, up to B
′
. The monopolist earns the difference between the price PM and MC
for each unit sold. Label the difference between the price and the MC curve as
producer surplus, or profits.
d. Outline the area of total Home surplus with a Home monopoly.
e. Compare your answer with parts (a) and (d), and outline what the difference
between these two areas is. What is this difference called and why?
Work It Out
Figure 9-2 shows the free-trade equilibrium under perfect competition and under
monopoly (both with the price PW). In this problem, we compare the welfare of Home
consumers in the no-trade situation and under free trade.
a. Under perfect competition, with the price PW, label the triangle of consumer
surplus and the triangle of producer surplus. Outline the area of total Home
surplus (the sum of consumer surplus and producer surplus).
b. Based on your answer to part (a) in this problem and part (a) of the last problem,
c. Under monopoly, still with the price PW, again label the triangle of consumer
surplus and the triangle of producer surplus.
d. Based on your answer to part (c) in this problem and part (d) of the last problem,
outline the area of gains from free trade under Home monopoly.
e. Compare your answer to parts (b) and (d). That is, which area of gains from trade
is higher and why?
Answer: The area representing gains from trade is larger in part (d) than in part
3. Rank the following in ascending order of Home welfare and justify your answers. If
two items are equivalent, indicate this accordingly.
a. Tariff t in a small country with perfect competition
b. Tariff t in a small country with a Home monopoly
c. Quota with the same imports M in a small country, with a Home monopoly
d. Tariff t in a country facing a Foreign monopoly
Answer: c < a = b < d. As shown in Problem 2, a small country with free trade has
4. Refer to the prices of Japanese automobile imports under the VER (Figure 9-5) and
answer the following:
a. What component of the price of imported automobiles from Japan rose the most
during the period 1980 to 1985?
b. Sketch how Figures 9-5 and 9-6 might have looked if the United States had
applied a tariff to Japanese auto imports instead of the VER (with the same level
of imports). In words, discuss how the import prices and U.S. prices might have
compared under a tariff and the VER.
Answer: Under a percentage (i.e., ad valorem) tariff, the relative price of high-
c. Which policy—a tariff or the VER—would have been least costly to U.S.
consumers?
Answer: Because the tariff would lead to a smaller increase in the prices of small
5. In this problem, we analyze the effects of an import quota applied by a country facing
a Foreign monopolist. In Figure 9-7, suppose that the Home country applies an import
quota of X2, meaning that the Foreign firm cannot sell any more than that amount.
a. To achieve exports sales of X2, what is the highest price that the Foreign firm can
b. At the price you have identified in part (a), what is the Home consumer surplus?
c. Compare the consumer surplus you identify in part (b) with the consumer surplus
under free trade. Therefore, outline in Figure 9-7 the Home losses due to the
quota. Hint: Remember that there is no Home firm, so you do not need to take
into account Home producer surplus or tariff revenue. Assume that quota rents go
to Foreign firms.
d. Based on your answer to (c), which has the greater loss to the Home country—a
tariff or a quota, leading to the same level of sales X2 by the Foreign firm?
6. Suppose that the demand curve for a good is represented by the straight line
P = 20 − 2Q
Answer: In italics in the following chart.
Quantity
Price
Total
Revenue
0
20
0
1
18
18
2
16
32
3
14
42
a. Draw a graph containing both the demand curve and marginal revenue curve.
Answer:
b. Is the marginal revenue curve a straight line as well? What is the slope of the
marginal revenue curve? How does that slope compare with that of the demand
curve?
Answer: Like the demand curve, the marginal revenue curve is a straight line.
c. Does the marginal revenue curve contain negative values over the specified range
of quantities? Explain why or why not.
7. Consider the case of a Foreign monopoly with no Home production, shown in Figure
9-7. Starting from free trade at point A, consider a $5 tariff applied by the Home
government.
a. If the demand curve is linear, as in Problem 6, what is the shape of the marginal
revenue curve?
b. How much does the tariff–inclusive Home price increase because of the tariff, and
how much does the net-of–tariff price received by the Foreign firm fall?
Answer: Because the marginal revenue curve is steeper than the demand curve
c. Discuss the welfare effects of implementing the tariff. Use a graph to illustrate
under what conditions, if any, there is an increase in Home welfare.
Answer: Refer to the following figure: The tariff decreases Home consumer
8. Suppose the Home firm is considering whether to enter the Foreign market. Assume
that the Home firm has the following costs and demand:
Fixed costs = $100
Marginal costs = $15 per unit
Local price = $30
Local quantity = 40
Export price = $25
Export quantity = 20
a. Calculate the firm’s total costs from selling only in the local market.
Answer:
b. What is the firm’s average cost from selling only in the local market?
Answer:
c. Calculate the firm’s profit from selling only in the local market.
Answer:
d. Should the Home firm enter the Foreign market? Briefly explain why.
e. Calculate the firm’s profit from selling to both markets.
Answer:
f. Is the Home firm dumping? Briefly explain.
9. Suppose that in response to a threatened antidumping duty of t, the Foreign monopoly
raises its price by the amount t.
a. Illustrate the losses for the Home country.
b. How do these losses compare with the losses from a safeguard tariff of the
amount t, applied by the Home country against the Foreign monopolist?
c. In view of your answers to (a) and (b), why are antidumping cases filed so often?
Answer: Despite their higher welfare costs, antidumping tariffs have a higher
10. Why is it necessary to use a market failure to justify the use of infant industry
protection?
Answer: If all markets are working perfectly, there is no reason a potentially
successful fledgling industry cannot survive without government intervention. Let us
11. What is a positive externality? Explain the argument of knowledge spillovers as a
potential reason for infant industry protection.
Answer: Positive externality exists when the increase in production by one firm
12. If infant industry protection is justified, is it better for the Home country to use a tariff
or a quota, and why?
Answer: To the extent that the Home infant industry has market power, it is better to