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ImportTariffsandQuotasunderPerfectCompetition1.ThefollowingquestionsrefertoSideBar:KeyProvisionsoftheGATT.a.IftheUnitedStatesappliesatarifftoaparticularproduct(e.g.,steel)importedfromonecountry,whatistheimplicationforitssteeltariffsappliedtoallothercountriesaccordingtothe“most-favored-nation”principle?Answer:TheMFNprinciplelevelstheplayingfieldamongcountrieswithre-gardtoany“advantage,favour,privilegeorimmunitygrantedbyanycontractingpartytoanyproduct...”Thus,iftheUnitedStatesremovedatariffonsteelim-portsfromaparticularcountry,itwouldnecessarilyhavetoremoveitfortheotherGATTcountries.ThusMFNtreatmentwouldpreventtheapplicationofasteeltarifftocertaincountrieswhereasothershadlowerornotariffs.Con-versely,auniformtariffonsteelimportsfromallcountriesalikewouldnotvio-latetheMFNprinciple.b.IsArticleXXIVanexceptiontomost-favored-nationtreatment?Explainwhyorwhynot.Answer:ArticleXXIVallowsforthecreationofcustomsunionsandfree-tradeareas.Bydefinition,thesecontradicttheMFNprinciple:Tradebarriersarelow-eredwithintheareaorunionwithoutacorrespondingdecreaseinbarrierstooutsidecountries.c.UndertheGATTarticles,insteadofatariff,canacountryimposeaquota(quan-titativerestriction)onthenumberofgoodsimported?Whathasbeenoneex-ceptiontothisruleinpractice?Answer:ArticleXIexpresslyprohibitstheapplicationofquantitativerestrictionsbyanyGATTcountrytoanyproduct.TheMFAwasanotableexceptioninpractice;itallowedCanada,theUnitedStates,andEuropetorestricttheamountoftextilesandapparelproductsthatwereimportedfromgarment-producingcountries.S-6982.Considerasmallcountryapplyingatariff,t,toimportsofagoodlikethatrepre-sentedinFigure8-5.a.Supposethatthecountrydecidestoreduceitstarifftot.RedrawthegraphsfortheHomeandimportmarketsandillustratethischange.WhathappenstothequantityofgoodsproducedatHomeandtheirprice?Whathappenstothequan-tityofimports?Answer:Thereductionofthetariff,andcorrespondingdecreaseindomesticpriceinthesmallcountry,leadstoareductionindomesticproduction(toS3)andanincreaseindomesticquantitydemanded(toD3).Theresultisanincreaseinimports(toM3).Seethefollowingfigure.b.Aretheregainsorlossestodomesticconsumersurplusduetothereductionintariff?Aretheregainsorlossestodomesticproducersurplusduetothereduc-tionintariff?Howisgovernmentrevenueaffectedbythepolicychange?Illus-tratetheseonyourgraphs.Answer:Consumersurplusincreasesbecauseconsumersnowbuyagreaterquantityofproductsatalowerprice.Domesticproducersurplus,ontheotherhand,decreasesbecauseproducerssellasmallerquantityofproductsatalowerprice.GovernmentrevenuechangesfromtherectangleS2D2PWPWttotherectangleS3D3PWPWt.Noticethattheareaoftherectangledoesnotneces-sarilydecreasewhenthetariffisloweredbecause,althoughthetaxperimportisless,theamountofimportshasincreased.c.Whatistheoverallgainorlossinwelfareduetothepolicychange?Answer:Theoverallwelfaregainfromthereductioninthetariffisillustratedbythedecreaseintotaldeadweightloss.Onourgraphsthisisthereductioninthesizeofthestripedtriangles;afterthereductioninthetariff,totaldeadweightlossisrepresentedbythesmallershadedtriangles.3.Consideralargecountryapplyingatariff,t,toimportsofagoodlikethatrepresentedinFigure8-7.a.Howdoestheexportsupplycurveinpanel(b)comparewiththatinthesmall-countrycase?Explainwhythesearedifferent.Answer:Theexportsupplycurveisupward-slopinginthelarge-countrycase(itwashorizontalinthesmall-countrycase).Inthesmall-countrycase,ahori-zontalexportsupplycurvemeansthatthesupplyofexportsfromtherestoftheworldisinfinitelyelastic.Thiscorrespondstothepricetakingassumptioninper-fectcompetition.Incontrast,anupward-slopingexportsupplycurvemeansthatthepriceofexportsfromtherestoftheworldrespondswhenthelargecountrychangesitsimportdemand.Forinstance,ifthelarge-countryimporterappliesaS-70Solutions■Chapter8ImportTariffsandQuotasunderPerfectCompetitionQuantitySDMS1S3S2D2D3D1M2M3M1X*X*+tPW+tPW+tPW(a)Domesticmarket(b)ImportmarketImportsPricePricetariffthatdecreasesitsdemandforimports,thepricechargedbyforeignex-portersfalls.b.Explainhowthetariffaffectsthepricepaidbyconsumersintheimportingcoun-try,andthepricereceivedbyproducersintheexportingcountry.Usegraphstoillustratehowthepricesareaffectedif(i)theexportsupplycurveisveryelastic(flat),or(ii)theexportsupplycurveisinelastic(steep).Answer:RefertoFigure8-5:Inthesmall-countrycase(flatexportsupplycurve),atariffincreasestheamountthatconsumerspaybyexactlytheamountofthetariffandforeignexportersarepaidtheoriginalworldprice,P*;thedif-ferenceiscollectedbythedomesticgovernmentastaxrevenue.RefertoFigure8-7:Withanupward-slopingexportsupplycurve(inthelarge-countrycase)for-eignexportersreducetheirpriceduetoatariff;thatis,foreignexportersreceivelessthantheydidpriortothetariff.Domesticconsumerspaymorethanbefore,butbylessthanthefullamountofthetariff.Again,thedifferencebetweenwhatconsumerspayandwhatForeignexportersreceiveistheamountofthetariff,t,collectedbythedomesticgovernment.Inthelarge-countrycase,theincidenceofthetariffissharedbydomesticconsumersandforeignproducers.Moreover,asteeperforeignexportsupplycurveimpliesthatforeignexportersabsorbmoreofthe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