Regional Economic Regional Economic IntegrationIntegration

Effect of an Import Effect of an Import TariffTariff

AssumptionsAssumptions perfect competition

– homogeneous goods – no market power of buyers and sellers – Perfect and symmetric Information about price and quality

No frictions:– No transport costs and transactions costs– Full employment (important: no change in employment!)

Perfect factor mobility inside a country, perfect immobility of factors between countries

Static analysis Partial equilibrium analysis

A market in autarky A market in autarky

Welfare ? Consumer surplus

Producer surplusSI

pDI

qqA

pA

The market under free tradeThe market under free trade

welfare ? Consumer surplus

Producer surplus Redistribution

Welfare gain

SI

pDI

qqA

pA

SW

qFH

pFH

q‘FH

Import qFH – q‘FH

Import TariffImport Tariff

welfare ?

Consumer surplus

Producer surplus

Redistributioneffect

Welfare loss

Consumtion effect:

qFH qZ

SI

pDI

q

SW

qFH

pFH

q‘FH qZ

pZ

q‘Z

Protective effect:

q‘FH q‘Z

Tariff revenue

Traditional Analysis of Free Traditional Analysis of Free Trade AreasTrade Areas

Home market : quantities before Home market : quantities before FTAFTA

Home Production ?

C‘

SH

pDH

q

SW

A

pFH

A‘

Import ?

C-C‘

C

pFH+th

C‘

Home market: welfare before FTAHome market: welfare before FTA

welfare ?

Consumer surplus

Producer surplus

SH

pDH

q

SW

A

pFH

A‘ C

pFH+th

C‘

Tariff revenue

Home market : quantities after Home market : quantities after FTAFTA

Home Production ?

B‘

SH

pDH

q

SW

A

pFH

A‘

Import ?

B-B‘

B

pFH+tl

B‘ C

pFH+th

C‘

Trade Creation

C‘-B‘ + B-C

Origin of imports ?

Trade Diversion

C-C‘

Home market : welfare after FTAHome market : welfare after FTA

welfare ?

Consumer surplus

Producer surplus

Redistributioneffect

Welfare loss

SH

pDH

q

SW

A

pFH

A‘

Tariff revenue ?

B

pFH+tl

B‘ C

pFH+th

C‘

Welfare gain