Faronia’s protection of footwear producers

Read the extracts and answer the questions that follow.

Text A — A tariff on footwear

1. Faronia imposed a 20% tariff on imported footwear. Retail prices increased and imports fell, while domestic firms expanded production. Some firms import leather and machinery, so they receive little benefit from the policy when imported inputs become more expensive.

2. The government collects tariff revenue, but consumer groups argue that the policy reduces consumer surplus and creates two efficiency losses.

Text B — Alternative protection

1. Domestic producers have proposed replacing the tariff with an import quota. They expect a quota to provide more certainty about the maximum quantity imported. The government has not decided whether licences would be auctioned or allocated free to importers.

2. Economists warn that a quota may be less transparent and encourage firms to spend resources lobbying for licences. A production subsidy would not increase the footwear price but would require government expenditure.

Table 1 — Imported footwear

Annual footwear imports and domestic consumption in Faronia.

Table 2 — Retail footwear price index

Retail footwear price index before and after the tariff.

Galena’s tariff on imported fertilizer

Read the extracts and answer the questions that follow.

Text A — Fertilizer protection

1. Galena imposed a specific tariff on imported fertilizer to support a small domestic fertilizer industry. Domestic fertilizer producers expanded output, but farmers now pay a higher price and use less fertilizer.

2. Lower fertilizer use has reduced crop yields. Food processors also report higher prices for agricultural inputs, while the government receives tariff revenue from remaining imports.

Text B — Policy alternatives

1. Agricultural associations propose replacing the tariff with a domestic production subsidy. Consumers would then continue paying the world price while domestic fertilizer output increased.

2. Economists emphasize that producer surplus gained by fertilizer firms should be compared with consumer losses, fiscal effects and the inefficient use of resources. The government is also considering technical standards for fertilizer purity.

Table 1 — Fertilizer imports and use

Fertilizer imports and use in Galena before and after the tariff.

Table 2 — Crop-yield index

Galena’s crop-yield index before and after the fertilizer tariff.

Hesperia’s quota on electric vehicles

Read the extracts and answer the questions that follow.

Text A — Restricting vehicle imports

1. Hesperia limits annual imports of electric vehicles using a binding quota. The domestic price has risen above the world price, domestic vehicle production has increased and consumers purchase fewer electric vehicles.

2. Import licences are given to foreign manufacturers. These firms receive the difference between the higher Hesperian price and the world price as quota rent, so part of the income generated by the restriction leaves Hesperia.

Text B — Wider effects

1. Environmental groups argue that slower adoption of electric vehicles increases demand for petrol vehicles and urban air pollution. Domestic manufacturers state that the quota gives them predictable market access.

2. The government is considering auctioning licences or replacing the quota with a tariff. Either policy could provide government revenue, although consumers would continue to face a higher price if protection remained equivalent.

Table 1 — Electric-vehicle imports

Table 1: Electric-vehicle imports and domestic production

Table 2 — Electric-vehicle registrations

Annual electric-vehicle registrations in Hesperia before and after the import quota.

Ilyria’s production subsidy for textiles

Read the extracts and answer the questions that follow.

Text A — Textile support

1. Ilyria provides a payment for every metre of fabric produced by domestic textile firms. This production subsidy shifts domestic supply downwards and allows firms to compete with imports while consumers continue paying the world price.

2. Domestic production and employment have increased, while imports have fallen. The government’s expenditure applies to all subsidized domestic output, not only the additional output.

Text B — Costs of support

1. The subsidy increases producer surplus, but government expenditure is larger than the producer gain. The difference represents a production welfare loss as resources move into relatively high-cost domestic production.

2. Some subsidized factories use old machinery and cause water pollution. The government is considering making subsidy eligibility conditional on compliance with an environmental standard.

Table 1 — Domestic textile output

Annual domestic textile output and consumption in Ilyria

Table 2 — Textile employment

Textile employment before and after the production subsidy.

Jorvik’s wheat export subsidy

Read the extracts and answer the questions that follow.

Text A — Subsidized wheat exports

1. Jorvik pays farmers for each tonne of wheat exported. The export subsidy raises the price received from export sales above the world price. Domestic sellers therefore also charge the higher price within Jorvik.

2. Wheat production and exports have increased, while domestic wheat consumption has decreased. Bread producers face higher input costs and the government’s subsidy expenditure has grown.

Text B — Distribution and trade

1. Farm owners gain producer surplus, but consumers lose consumer surplus. The subsidy also creates production and consumption distortions and may reduce foreign farmers’ revenue.

2. Two trading partners have threatened to impose tariffs on Jorvik’s wheat. The government is considering replacing export payments with a subsidy for investment in more efficient farm machinery.

Table 1 — Wheat exports

Annual wheat exports and production in Jorvik

Table 2 — Domestic wheat consumption

Annual domestic wheat consumption in Jorvik before and after the export subsidy.

Kambara’s pharmaceutical regulations

Read the extracts and answer the questions that follow.

Text A — Medicine approval

1. Kambara requires imported medicines to repeat clinical testing already completed in their country of origin. It also requires packages to use a unique size and label. These legally enforceable regulations have increased compliance costs and delayed market entry.

2. Domestic pharmaceutical firms do not face repeat testing. Foreign suppliers therefore describe the measures as an administrative barrier rather than a proportionate health policy.

Text B — Health and competition

1. The government argues that strict approval procedures prevent unsafe or ineffective medicines from being sold. However, hospitals report higher medicine prices and fewer available treatments. Small foreign producers are particularly affected by fixed testing costs.

2. Kambara is considering accepting certificates from foreign regulators that meet equivalent scientific standards. Domestic firms warn that increased competition would reduce their market share.

Table 1 — Approval time for imported medicines

Average approval times for medicines in Kambara.

Table 2 — Imported medicine varieties

Imported medicine varieties before and after the regulation.

Tariffs on bicycles in Argentina

Argentina imports bicycles and is assumed to be a small open economy in this market. To support domestic bicycle manufacturers, the government introduced a tariff of 50 pesos per imported bicycle. Table 1 shows market information before and after the tariff.

Table 1

Argentine bicycle market before and after a tariff.

For parts (v) and (vi), assume that domestic demand and supply curves are linear between the before- and after-tariff outcomes.

Domestic bicycle producers claim that the tariff will protect employment and allow investment in more efficient production. However, retailers argue that higher bicycle prices will reduce sales and discourage cycling. Foreign bicycle manufacturers have warned that they may reduce investment in distribution facilities in Argentina.

An import quota on rice in Norland

Norland imports rice at a world price of 300 noras per tonne. The government is considering an annual import quota of 50 000 tonnes to increase domestic food production. Table 1 shows domestic supply and demand at different prices.

Table 1

Table 1. Domestic rice supply and demand in Norland.

Assume that domestic supply and demand are linear between the prices shown in Table 1.

The government could auction the import licences or allocate them free of charge to foreign rice exporters. Low-income households spend a large proportion of their income on rice, while domestic farmers argue that protection is necessary to maintain rural employment.

An export subsidy for coffee in Costavia

Costavia exports coffee at a world price of 2.00 cocos per kg. The government is considering an export subsidy of 0.40 cocos for each kg exported. Table 1 shows the expected effects on the domestic coffee market.

Table 1

Costavian coffee market before and after an export subsidy

Coffee producers argue that the subsidy would increase farm incomes and export market share. Consumer organizations are concerned about domestic food prices, while the finance ministry expects significant expenditure. Competing coffee exporters have suggested that they may introduce trade restrictions against Costavian coffee.

For parts (a)(iv) to (a)(vii), assume that Costavia is a small price-taking economy, the world price remains constant at 2.00 cocos per kg, and domestic demand and supply curves are linear over the relevant ranges. Ignore the effects of foreign retaliation in the numerical calculations; discuss its possible effects in part (b).

Safety standards for imported electronic devices in Estara

Estara introduced a safety standard requiring electronic devices to undergo additional testing, certification and customs inspection. The standard applies to imported and domestic products, but foreign suppliers must complete testing in Estara even if equivalent tests have been completed abroad.

Table 1 shows market outcomes before and after the standard.

Table 1

Estaran electronic-device market before and after the safety standard.

Table 2 shows the compliance costs faced collectively by foreign suppliers after the standard.

Table 2

Foreign-supplier compliance costs after the safety standard

The government argues that the standard reduces the risk of electrical fires and corrects information failure. Consumer groups accept the need for safety testing but question why equivalent foreign certificates are not recognized. Small foreign firms report that the fixed certification cost may force them to leave the Estaran market.

Lydora’s protection of its fishing industry

Read the extracts and answer the questions that follow.

Text A — A tariff and production subsidy

1. Lydora imposes a tariff on imported canned fish. The policy has raised domestic prices, increased local production and reduced consumption and imports. Canning firms benefit, but retailers and households face higher prices.

2. The government also provides a production subsidy to fishing fleets. Because consumers can still purchase imported fresh fish at the world price, the subsidy increases domestic production without directly raising the fresh-fish price.

Text B — Sustainability concerns

1. Marine scientists warn that larger catches are reducing fish stocks. Expanded domestic production may therefore create a welfare loss beyond the standard production distortion.

2. The government is considering replacing financial protection with a standard requiring all domestic and imported fish to be certified as sustainably caught. Foreign suppliers support equal treatment but are concerned about expensive documentation.

Table 1 — Canned-fish imports

Table 1: Annual canned-fish imports and domestic consumption in Lydora.

Table 2 — Domestic fish-stock index

Lydora’s domestic fish-stock index before and after expanded support.

Alternative restrictions on steel imports in Darsenia

Darsenia is a small open economy that imports steel at a world price of 500 dinars per tonne. The government is considering either a tariff of 100 dinars per imported tonne or an import quota of 100 000 tonnes. The two policies would produce the same domestic price and market quantities.

Table 1

Table 1: Darsenian steel market under free trade and alternative protection.

For all calculations of consumer surplus, producer surplus and national welfare, assume that the domestic demand and supply curves are straight lines between the free-trade and protected outcomes.

If a quota is selected, the government may auction the import licences for their full value. Alternatively, it may allocate the licences free of charge to foreign steel exporters. Domestic steel firms support protection, but appliance and construction firms report that steel accounts for a substantial share of their production costs.