A’s offer curve

1.  Charles van Marrewijk A’s offer curve We have seen how to derive an ‘offer curve’, showing combinations of A’s import exports offered in exchange for imports at different price levels. A’s export “Optimal” tariffs; 1

2.  Charles van Marrewijk “Optimal” tariffs; 2 A’s offer curve Look at point C; on the price line it is the best deal available to country A A’s import Obviously, if country A would get more imports for the same exports its welfare would rise C A’s export

3.  Charles van Marrewijk This implies that through each point on the offer curve we can draw an Iso-welfare curve for country A. This curve must be tangent to the price line from the origin through that point. U1 U2 U0 “Optimal” tariffs; 3 A’s offer curve A’s import Welfare for country A increases to the north-west: U0 < U1 < U2 A’s export

4.  Charles van Marrewijk The offer curve it faces from the Rest of the World (ROW) is a straight line (country A cannot influence its terms of trade) U1 U2 U0 An omniscient central planner ROW offer curve Maximizes country A’s welfare given this restriction at point D: no tariffs “Optimal” tariffs; 4 If country A is a country small A’s offer curve A’s import D A’s export

5.  Charles van Marrewijk The ROW offer curve is not a straight line (country A can influence its terms of trade) U1 U2 ROW offer curve U0 An omniscient central planner does not maximize country A’s welfare given this restriction at point D “Optimal” tariffs; 5 If A is a country large A’s offer curve A’s import D A’s export

6.  Charles van Marrewijk A’s welfare the ROW offer curve is maximized at point E new U3 Country A’s offer curve using an “optimal” tariff such that the new offer curve intersects at point E “Optimal” tariffs; 6 given old A’s import This gives the central planner an incentive to manipulate U1 U2 ROW offer curve E D U0 A’s export

7.  Charles van Marrewijk “Optimal” tariffs; 7 For ROW, however, the situation is reverse Through each point on the ROW offer curve is an iso-welfare curve tangent to a line through the origin. ROW export Welfare increases to the south-east ROW import

8.  Charles van Marrewijk “Optimal” tariffs; 8 ROW, therefore, has an incentive to manipulate its offer curve through ‘optimal’ tariffs to go from point D to point F ROW export, A’s import D F new ROW import, A’s export

9.  Charles van Marrewijk new Further may worsen the situation new “Optimal” tariffs; 9 A wants to be clever to move from D to E ROW wants to be clever to move from D to F ROW export, A’s import The end result of all this cleverness is a move from D to G; everyone is worse off E D retaliation F G ROW import, A’s export