Lecture Notes: Tariffs as a Form of Protectionism

Introduction to Tariffs and Protectionism

• Purpose of Protectionism: Protect domestic industries from foreign competition by reducing imports.
• Tariffs: A tax on imports used as a protectionist measure.

Free Trade Diagram Overview

• Diagram Components:
  • Price and Quantity: Generic representation.
  • Domestic Supply and Demand
  • World Supply: Assumes world suppliers have a comparative advantage and can charge lower prices.
  • Perfectly Elastic Supply Curve: World supply curve is horizontal due to ease of supplying domestic markets.
  • Price and Quantity Points:
    • Domestic Supply at Q1
    • Domestic Demand at Q2
  • Excess Demand: Difference between Q1 and Q2, covered by imports.

Impact of Tariffs

• Supply Curve Shift: Tariffs cause the world supply curve to shift up to SW plus tariff.
• Price Increase: Market price rises from PW to PW plus tariff.
• Changes in Domestic Supply and Demand:
  • Domestic Supply: Extends from Q1 to Q3
  • Domestic Demand: Contracts from Q2 to Q4
  • Result: Imports reduced due to changes in domestic supply and demand.

Analysis of Tariff Diagram

• Government Revenue:
  • Represented by the green box.
  • Calculated as the tariff value times the quantity of imports (Q3 to Q4).
• Welfare Losses:
  • Consumer Surplus Loss: Shaded red triangle shows deadweight loss of consumer surplus.
  • World Efficiency Loss: Additional red triangle shows deadweight loss due to inefficient domestic production.

Justifications for Tariffs

• Protecting Infant Industries: Allows domestic growth and economies of scale.
• Preventing Dumping: Raises import prices to offset artificially low dumping prices.
• Domestic Employment: Increase in domestic supply may lead to increased employment.
• Countering Low-Cost Labor Abroad: Squeezes imports and increases prices to counter low-cost advantages.
• Government Revenue: Increased via tariffs, shown in the green box.
• Improving Current Account: Reduced imports may improve the current account balance.

Conclusion

• Diagram Significance: Important tool for understanding the effects of tariffs.
• Upcoming Topics: Future videos will cover protectionism challenges and detailed tariff diagram analysis.

Note: Stay tuned for upcoming videos that will delve deeper into the specifics of tariffs and protectionism.