The cost of redistributing income through trade policy: Addenda

Abstract

The Figure is drawn to illustrate both the per capita production cost and the per capita consumption cost in an economy with two goods 2. As explained in the earlier paper, ab is the production cost, where income is measured in international prices. The change in real income plus the change in the internal price ratio from p to ~ (l+t) causes the consumption point to shift from xa to x b. But consumption at point x b, with prices at the ratio p ( l + t ) , yields the same satisfaction as consumption at point x c, with prices at the ratio p. Thus, the consumption cost imposed by the tariff can be measured by the distance bc. In other words, if the community produced at z c, but traded at international prices and consumed at xc, it would be just as well off as producing at z b and consuming at Xb. Potentially, the community could produce at z b, trade at international prices, and reach a higher indifference curve by consuming for example at point x' b . Thus, we speak of bc as measuring the consumption cost imposed by the tariff 8. This cost arises because the price ratio facing consumers under the tariff, p ( l + t ) , differs from the price ratio under free trade, ~. Strictly speaking government could avoid consumption costs by shifting production from za to z b through taxes and subsidies and letting trade take place at the international price ratio. Consumption