1
$\begingroup$

First Review What I do understand,

The demand and supply chart shows once imports are allowed...

enter image description here

Tariff is added on imports resulting in loss of consumer surplus and increase in supplier surplus.

enter image description here

I get everything up until to this point. However...

enter image description here

Is this wrong? But this traditional textbook version. Green represents both, width represents imported quantity and area represents govt surplus. This is not what happens in real life. If there are two products both priced $10, I'd buy either one all things being equal regardless of what company or country it was made in. For most products I'm not going to care whether they were imported or domestically made. YET, this graph very clearly assumes import will stop where local suppliers are able to provide.

Correct version should be like this:

enter image description here

or maybe like this:

enter image description here

$\endgroup$
  • $\begingroup$ I think by definition the line going up shows the amount of domestic production. It does not make sense to include imports in that line because if that line was total production/imports, the whole graph doesn't make sense. (how could consumption be greater than production?) $\endgroup$ – user253751 Sep 1 at 17:27
2
$\begingroup$

The standard supply and demand model is a model. Models by definition are distorted version of reality not reality by themselves. The model also ignores transportation costs and other real life issues as well.

However, think about the main message of the model that tariffs decrease overall welfare. Assuming that consumers randomly decide to either consume imported product or domestic product would indeed affect possible size of government tax revenue but not in any way change the main outcome that overall welfare has decreased as when you calculate area of all losses even in corner case where everything is imported taking into account higher government revenue there would still be net welfare loss. Hence adding this bit of 'realism' (I am using '' as randomly picking product is still not realistic either) would complicate math, make your exams more difficult and would not teach you much more. The point of every model is to be as simple as possible in order to be general but still complex enough to allow us to analyze the issue of interest in a way that exposes the underlying economic mechanism.

Of course, different people can disagree about where the dividing line between being too simple to be useful is - that’s an opinion based question, but it’s common for undergraduate models to be oversimplification. In undergraduate physics you will be constantly assuming perfect vacuum, massless points, zero friction etc. all of which is unrealistic in order to gain enough knowledge to understand more nuanced models. All fields use this method of ‘teaching beginners by oversimplified models’ for better or worse.

Later in your academic carrier at PhD or Master level you will encounter far more complex and also more realistic trade models. If you want to see them before you get there you can read Advanced International Trade by Feenstra or Applied International Trade by Bowen, Hollander or Viaene. Or published papers on these topics. Some of those models deal with geography, monopolistic competition and other issues that address international trade in more nuanced way than a Econ 101 could. For the sort of question you are asking here some industrial organization (IO) model with explicitly modeled competition would be more appropriate than assuming 50/50 split for example.

PS: Your last picture is actually not correct. The Government revenue, in this model, will always be a rectangle since it is by definition $Q_{import}*t$. A correct way of visualizing government revenue if you assume half of the quantity would be imported no matter what would be this:

enter image description here

| improve this answer | |
$\endgroup$
  • 1
    $\begingroup$ @MuhammadUmer 1. They assume that imports start when domestic supply is exhausted. 2. No in 50/50 imports would end up being half of all Q it does not matter if you slice the total rectangle that’s applied to half Q into smaller rectangles - you can always just group all imports together Q in equilibrium will be some value let’s say 100 if 50 percent of 100Q is imports it matters absolutely not in what order those Q arrived or were bought. Even if you would wanna distinguish it you would never get that inverted trapezoid you would just get cut rectangle with a slice whenever the import appears $\endgroup$ – 1muflon1 Sep 1 at 15:33
  • 1
    $\begingroup$ @MuhammadUmer it actually is a function but consider function Q=F+M where F is domestic prod. and M is an import. Does it make any sense using such linear function to say that if F=50 and M=50 that some of that F or M occurred first? This is static not dynamic function (time plays no role) in such static environment everything happens at once. Hence the X axis can be just split into red part F plus blue part M. It’s like adding line segments. Sure you could slice it in any arbitrary way but putting all imports next to each other is most convenient and area of those parts will always be Q*t $\endgroup$ – 1muflon1 Sep 1 at 15:45
  • 1
    $\begingroup$ @MuhammadUmer oh you want to assume that the probably 50/50 applies only to the part of supply produced by domestic suppliers. In that case yes, I thought you wanna apply it to whole supply. You should then be more specific because saying that probability of consumer to buy either domestically or import is 50/50 would implicitly mean you wanna apply it on total Q $\endgroup$ – 1muflon1 Sep 1 at 16:10
  • 1
    $\begingroup$ @MuhammadUmer yes you could do that in that way as well, I assumed that you just wanted to consider supply as whole. However, you should also note that its not that much more realistic - you still assume that there are infinite possible imports. $\endgroup$ – 1muflon1 Sep 1 at 16:50
  • 1
    $\begingroup$ @user253751 as I understand the OP question is why country will first fully exhaust its own supply before importing. That’s not oblivious as you say in your answer and it is oversimplified assumption because empirically countries do not necessarily always produce at full capacity and even if they do due to monopolistic competition a country can be exporting and importing the same product at the same time $\endgroup$ – 1muflon1 Sep 1 at 18:35
0
$\begingroup$

In this graph, the line going up, next to the green area, shows how many domestic suppliers are willing to produce the good for a certain price.

The line going down, next to the blue area, shows how many domestic consumers are willing to consume the good for a certain price.

The part of the domestic consumption which isn't produced domestically is imported. Because where else would those goods come from?

Now, you are asking, "Why does the domestic production line only include domestic producers? How do we know the domestic production isn't partly made up of domestic producers and partly of importers?". The answer, I hope, is obvious.

Also remember this graph is comparing different price levels. The "tariff" line is how much it costs to import the good, including the tariff. No imports will happen below that line, because they'd lose money.

In this model, it's assumed that the international economy is much bigger than the domestic one under consideration. Hence, importing the good does not noticeably affect the import price.

| improve this answer | |
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.