2.9 International Trade and Public Policy
Trading at the world price raises total surplus; tariffs and quotas raise domestic prices, helping producers, hurting consumers, and creating deadweight loss.
When a country opens to trade at a world price below its domestic equilibrium, it imports: domestic quantity demanded rises, domestic quantity supplied falls, and imports fill the gap between them at the world price. Consumers gain more surplus than producers lose, so total surplus rises — trade creates net gains even though it creates losers.
A tariff is a tax on imports: it raises the domestic price above the world price, expanding domestic production, cutting consumption, shrinking imports, and raising government revenue. The cost is two deadweight-loss triangles — one from inefficient extra domestic production, one from lost consumption.
An import quota limits the quantity of imports directly and has nearly identical effects on price, quantity, and deadweight loss — except the government collects no revenue; the price markup goes to whoever holds the import licenses. On the graph, imports shrink but do not disappear unless the policy is fully prohibitive.
Key terms for 2.9
Drag the curves yourself — the fastest way to make 2.9 stick.
Practice the math
Treating a tariff and a quota as identical in every way. Their price and quantity effects match, but a tariff raises GOVERNMENT revenue while a quota's markup goes to import-license holders.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free — no spam.
No spam. Unsubscribe anytime.