Taxes and International Trade: Examples and Exercises Lecture 9 – academic year 2015/16 Introduction to Economics Dimitri Paolini
Taxes and International Trade: Examples and Exercises Lecture 9 – academic year 2015/16 Introduction to Economics Dimitri Paolini.
Dec 14, 2015
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Taxes and International Trade: Examples and
Exercises
Lecture 9 – academic year 2015/16
Introduction to EconomicsDimitri Paolini
22
Index of examples/exercises
• Lect. 9.1 (taxes and welfare)
• Lect. 9.2 (taxes, elasticity and welfare)
• Lect. 9.3 (taxes and welfare, computation)
• Curiosity: Barbie and the globalization
• Lect. 9.4 (international trade)
• Lect. 9.5 Numerical exercise
• Lect. 9.6 (international trade)
33
Lect. 9.1
a) “If the Government introduced a tax on land, the rich landowners would transfer (at least part of) the tax burden to their poor tenants”. Comment.
b) “If the Government introduced a tax on real estate, the rich landlords would transfer (at least part of) the tax burden to their poor tenants”. Comment.
44
a) This statement is wrong. Since the curve of supply is perfectly inelastic the landowners cannot transfer the tax burden to their poor tenants. The latter do not share in the tax burden.
b) This statement is correct. The effeect of the tax depends on the elasticity of demand and supply. The cost of the tax will be shared by landlords and tenants. The impact of the tax will be stringer in the long period.
Lect. 9.1
55
Let’s consider the market for rubber.
a)How would the tax burden be shared if the supply curve is elastic and the demand curve is inelastic?
b)What if the reverse holds (i.e. supply is inelastic and demand is elastic)?
Lect. 9.2
66
Q*
P*
Consumer surplus
Producer surplus
Supply
Demand
AC
B
DPP
PC
P
Q
Lect. 9.2
77
a) In this case the tax burden is paid mainly by consumers; since the demand curve is inelastic consumers can hardly change their consumption level following an increase in price. The consumer surplus reduces of the are A + C.
Lect. 9.2
88
Q*Q*
P*P*
AACC
BBDD
PPPP
PPCC
PP
Lect. 9.2
Consumer surplus
Producer surplus
Supply
Demand
99
b) In this case the tax burden is paid mainly by the producers; since the supply curve is inelastic they cannot adjust their production following a change in price. The producer surplus diminishes of the area B + D.
Lect. 9.2
1010
a) The two equations describe the market:
QS = 2P
QD = 300 – P
Lect. 9.3
1111
a) Find equilibrium price and quantity
QS = QD
2P = 300 – P 3P = 300
P = 100
QS = QD = 200
Lect. 9.3
1212
Suppose that a tax T is introduced on consumption
a)Compute the price received by producers
b)Compute the price paid by consumers
c)Compute the new equilibrium quantity
d)Compute the fiscal revenue and net loss
Lect. 9.3
1313
If a new tax T is introduced on consumption the price received by the producers is:
QS = QD
2P = 300 – (P + T)
2P = 300 – P – T
3P = 300 – T
P = 100 – T/3
Lect. 9.3 (a)
1414
The price paid by consumers is:
P + T = (100 – T/3) + T da cui P + T = 100 + T(– 1/3 +1)
thereforeP + T = 100 + 2T/3
Lect. 9.3 (b)
1515
The quantity sold is:QS = 2·P = 2 ·(100 – T/3) = 200 – 2T/3
Comments: as we expected, as a consequence of the tax, the size of the market reduces and the tax burden is shared in by producers and consumers (1/3 is paid by the producers and 2/3 is paid by the consumers).
Lect. 9.3 (c)
1616
Find the fiscal revenue as a function of T, knowing that it is equal to T· Q:
Fiscal revenue = T · Q T · (200 – 2T/3)
200·T – 2T2/3
Lect. 9.3 (d)
1717
TT T T · Q· Q00 00
100100 13.333,313.333,3
150150 15.00015.000
200200 13.333,313.333,3
300300 00
Lect. 9.3 (d)
1818
Graphically:
TT30030000
RevenueRevenue
150150
15.00015.000
Lect. 9.3 (d)
1919
Derive the net loss as a function of T and draw the graph for T included between 0 and 300.
Lect. 9.3 (d)
2020
200200
100100
SupplySupply
DemandDemand
100-T/3100-T/3
100+2T/3100+2T/3
Value of the Value of the taxtax
TT
AA
BB
DD
FF
CC
EE
200 - 2T/3200 - 2T/3
Lect. 9.3 (d)
2121
The net loss is equal to the triangle C + E, whose base is T and height equal to the variation in quantity, i.e. 200 – (200 – 2T/3) = 2T/3.
Therefore, the net loss is equal to ½ ( T x 2T/3) = T2/3.
For algebra addicted: the net loss for values of T included between 0 and 300 increases exponentially.
Lect. 9.3 (d)
2222
Graphically:
TT30030000
Net lossNet loss
Lect. 9.3 (d)
2323
Is T = 200 optimal?
No because, as shown by the graph, at that point the fiscal revenue reduces compared to the values of T included between 0 and150.
The best decision is to set T = 150 if the objective of the government is to maximize the fiscal revenue, or T = 0 if the objective is to minimize inefficiencies.
Lect. 9.3
2424
Barbie and the globalization?
2525
Barbie is an American product? (1 / 3)
Producer: US toys company (Mattel). However, there are no plants in US to produce this doll.
Material inputs (rubber for body and hairs) come from Taiwan and Japan.
The plate to produce the dolls as well as some colours come from the US.
2626
Assembly and decoration of the dolls is realized in the Philippines and Taiwan (more recently Indonesia, Malaysia and China).
Also the cotton textile used to produce the doll’s dresses comes from China.
Most of the Barbie are sent to the US from Hong Kong.
Barbie is an American product? (2 / 3)
2727
The value of the doll in 1995 in Hong Kong was $2.
The selling price in US was nearly $10, out of which $1 was profit for Mattel and the rest was used to cover transportation costs, distribution, etc.
In 2001 the sales of Barbie worldwide were equal to 1,6 billion US dollars. No doubt that the largest part of this profits remain in the US (to Mattel, distributors and so on).
The idea of the product is America (and indeed the plates come from there), however can we really call it an American product?
Barbie is an American product? (3 / 3)
2828
The world price of wine is lower than the one one could get in US in the absence of international trade.
Draw the graph of the US wine market with international trade and show in a table the consumer surplus, producer surplus and total surplus.
What are the effects of a destruction of harvest on the world price? Show graphically and with a table what happens in the US market.
Lect. 9.4
2929
D
A
B
C
P*
Internal supply
Internal demand
World priceP
Import
QSint QDint
Consumer surplus
Producer surplus
P
Q
Lect. 9.4
3030
Consumer surplusConsumer surplus A + B + DA + B + D
Producer Surplus Producer Surplus CC
TOTAL SURPLUSTOTAL SURPLUS A + B + C + DA + B + C + D
US wine market in presence of free trade:
Lect. 9.4
3131
WORLD market: effects of a cold summer
11
PP11
Demand worldDemand world
SS1 1 worldworld
SS2 2 worldworld
PP22
QQ22
PP
Lect. 9.4
3232
D
A
B
C
Internal supply
Internal demand
World price 1P
Import
QSint QDint
Consumer surplus
Producer surplus
P
Q
Lect. 9.4
P2 World price 2
3333
A
B
C
Internal supply
Internal demand
World price 1P
QSint
Consumer surplus
Producer surplus
P
Q
Lect. 9.4
BIP2 World price 2
B D
QDint
3434
Consumer surplusConsumer surplus AA
Producer surplusProducer surplus C + BC + B
TOTAL SURPLUSTOTAL SURPLUS A + B + CA + B + C
Lect. 9.4
3535
Following the reduction in the world supply of wine and the consequent increase in world price, the total surplus is decreased. Indeed:
A + B +C < A+B+C+D
Lect. 9.4
3636
BUT:
The producer surplus is increased.
HOWEVER:
This increment is not sufficient to compensate the reduction in consumer surplus.
Lect. 9.4
3737
In the country of Copperland – whose economy is completely closed – the price of copper is 10 Eurocent (for 100 Kg.).
Lect. 9.5
3838
Questions:
(a) If the world price of copper is 100 Eurocent (for 100 Kg.), show (even with the help of a graph) what happens to equilibrium price and quantity when the Government of Copperland decides to open the economy to free trade.
(b) If the demand for copper is given by equation Q = 500 - 2P, compute the surplus of Copperland’s consumer before and after the opening of the economy.
Lect. 9.5
3939
Answer:
a)The price of copper in Copperland is lower than the world price (10 Eurocent < 100 Eurocent); when the government open the economy the internal price increases until is equal to the world price. In fact no producer has the incentive to accept a price lower than the world price.
Lect. 9.5 (a)
4040
00
Internal supplyInternal supply
Internal demandInternal demand
World priceWorld price
Price under Price under a closed a closed economyeconomy
Quantity Quantity suppliedsupplied
ExportExport
Internal quantity Internal quantity demandeddemanded
Price of Price of coppercopper
Quantity Quantity of copperof copper
Lect. 9.5 (a)
4141
Answer:
b1) The surplus of producers before the opening of the economy (in the absence of free trade) was equal to the area included between the internal price and the supply curve, while consumer surplus was equal to the area included between the demand curve and the internal price.
b2) With the opening of the economy, the surplus of producers increases, while the surplus of consumers decreases. Total surplus increases.
Lect. 9.5 (b)
4242
Calculations: if the demand curve is Q = 500 - 2P, then the vertical intercept (Q = 0) is P= 250 Eurocent (2,5 Euro).
In fact
0 = 500 – 2·P P = 500/2 = 250
Lect. 9.5 (b)
4343
Therefore the height of the triangle that represents the consumer surplus is
Before: 250 – 10 Eurocent = 240, that is the difference with respect to the internal price
After: 250 – 100 Eurocent 150, that is the difference with respect to the World price
Lect. 9.5 (b)
4444
00
SupplySupply
DemandDemand
Price of copperPrice of copper(Eurocent)(Eurocent)
Quantity of copperQuantity of copper480480
Lect. 9.5 (b)
1010
250250
4545
Calculations: the consumer surplus has the following base:
Before: 480 = quantity demanded in a closed economy, i.e., with P= 10 Eurocent, Q=480
After: 300 = quantity demanded in an open economy, i.e., with P= 100 Eurocent, Q=300
Lect. 9.5 (b)
4646
Results:
Before: surplus is (480 x 240)/2 = 57.600
After: surplus is (300 x 150)/2 = 22.500
Therefore the consumer surplus has decreased.
Lect. 9.5 (b)
4747
00
SupplySupply
DemandDemand
Price of copperPrice of copper(Eurocent)(Eurocent)
Quantity of copperQuantity of copper480480
1010
250250
Lect. 9.5 (b)
World priceWorld price
ExportExport
100100
300300
4848
French duty on Italian wine import:
According to French wine producers a duty on Italian wine import would increase fiscal revenue and increase employment.
Lect. 9.6
4949
P*
Internal supply
Internal demand
World priceP without duty
QS1 QD
1
P with duty
The introduction of the duty increases P
P
Q
Lect. 9.6
5050
P*
Internal supply
Internal demand
World priceP without duty
QS1 QD
1
P with duty
P
Q
Lect. 9.6
E
A
G
QO2 QD
2
F
…Import decreases
Producer surplus
increases
Consumer surplus
increases
Fiscal revenue
B
D
Dumping
Dumping is when a country exports or sells prodcuts in a foreign country for less than either the price in the domestic market , or the cost of making the product.
In price-to-price dumping, the exporter uses higher home-prices to supplement the reduced revenue from lower export prices. In price-cost dumping, the exporter is subsidized by the local government with duty drawbacks, cash incentives, etc.
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