5 Steps to a 5 AP Macroeconomics 2019

International Trade ❮ 171

•   Tariff revenue. The government collects $10 × 2 million = $20 million in tariff revenue,

as seen in the shaded box in Figure 12.10 This is a transfer from consumers of steel to

the government, not an increase in the total well-being of the nation.

•   Inefficiency. There was a reason the world price was lower than the domestic price. It was

more efficient to produce steel abroad and export it to the United States. By taxing this effi-

ciency, the United States promotes the inefficient domestic industry and stunts the efficient

foreign sector. As a result, resources are diverted from the efficient to the inefficient sector.

•   Deadweight loss now exists.

Quotas

Quotas work in much the same way as a tariff. An import quota is a maximum amount of

a good that can be imported into the domestic market. With a quota, the government only

allows two million tons to be imported. Figure 12.11 looks much like Figure 12.10, only

without revenue collected by government. So the impact of the quota, with the exception

of the revenue, is the same: higher consumer price and inefficient resource allocation.

Sd

Dd

Quantity of Steel

(millions of tons)

$ per ton

Pd = $1 00

8

Pt = $90

10 12

imports = 2

911

Pw = $80

dead weight loss

Figure 12.10

Figure 12.11

Sd

Dd

Quantity of Steel

(millions of tons)

$ per ton

Pd = $1 00

8

Pq = $90

10 12

import quota = 2

911

Pw = $80

“It is important
to know the
differences
between tariffs
and quotas.”
—Lucas, AP
Student