MARKETS, GOVERNMENTS & GLOBALIZATION Assignment
In absence of international trade, the price of a container of roses is $175 while the quantity bought is 6 million containers per year. Quantity sold is also 6 million containers per year. These values are determined by establishing the equilibrium price and quantity as shown in figure 1 below.
Under international trade, price is determined in the world market. Since wholesalers can buy roses at auction in Holland, the price will be $125. At a price of $125, quantity demanded is 12 million per year while local supply is only 2 million. It therefore means that Australian wholesalers will buy 2 million from the local market but import 10 million i.e.
In figure 1, the bold black line shows the equilibrium price and quantity no international trade
Figure 1: Price and Quantity without international trade
In absence of international trade, the price and quantity is determined by the intersection of demand and supply curves. The equilibrium quantity is 6 million a year and the price is $175.
Under free trade, the price is $125. Given the price of $125, local supply will be 2 million but this fails to meet the market demand of 12 million hence imports will be 10 million.
The imposition of a $25 tariff makes the importers to pay the world price plus the imposed tariff. The price rises from $125 to $150 leading to increased domestic production from 2 million to 4 million, reduced demand from 12 million to 9 million, and decreased imports form 10 million to 5 million.
Since the price has increase due to the imposed tariff, Australian consumers lose as quantity demanded decline. The combined higher price and low demand worsens consumers. On the other hand, Australian producers gains since they are able to sell the good at world price plus tariff. Domestic supply also increases. The combined higher price and larger production increases the profits. In conclusion, consumers lose more compared with gains by the producers given that they not only pay higher price and consumer lower quantities but they also pay tariff as revenue to the government.
Gains and losses from tariff is shown in figure 2
Figure 2: gains and losses from tariff
Without tax the price of brownie is 60 cents and 4 million are bought every day
With a tax of 20 cents on sellers, the price will be 70 cents per brownie i.e.
. Leading to a quantity demanded of brownies to be 3 million. The 20 cents is shared equally between consumers and sellers with each paying 10 cents of the tax.
By taxing buyers 20 cents, sellers will receive 50 cents per brownie while 3 million brownies will be consumed. Buyers will pay 70 cents per brownie. Eventually consumers and sellers will have contributed 10 cents towards the tax.