Tutorial on Partial Equilibrium Modeling:
Export Tax by a Large Country Exporter
The Microeconomics of International Trade
ECN 230
Roberto J. Garcia
School of Economics and Business, UMB
Economic effects of a specific export tax
Specific tax on exports
A per unit tax on exports (e.g., 30kr/kg) such that
the difference between the domestic price and the
world price is equal to 0, i.e., (PW)1 - (PD)1 = 0.
A tax has implications for prices, which affects
economic behavior and welfare. The economic
effects are studied by analyzing the change in
prices on:
Production, consumption and trade patterns, and
Producer and consumer welfare and the government's
budgetary position (i.e., expenditures and revenue).
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Economic effects of a specific export tax
Market analysis
Analyzing the production, consumption and trade
effects: the perspective of the exporting country
World market
Exporter's domestic market
P
PW
D
ES1
ES
[PW]1

τ0 PW
 [PD]1
S
[PW]1
PW
[PD]1
ED
[QX ]1 [QT]0

QT
[QS]0 [QS]1[QD]1 [QD]0


Q
3
Economic effects of a specific export tax
Economic intuition and expectations
Regardless of the reason a tax is applied, the result is a
reduction in the quantity exported. (Graphically, ES shifts
to the left by the per unit tax rate.) It is assumed that the
import-country's government does not take any policy
action to counter the export tax.
• The world price increases (PW) because a large seller on the
international market reduces export supply, i.e., a TOT effect.
• The internal price in the exporter's market decreases (PD)
because there is more of the good in the domestic market.
Producers and consumers react to the change in the
domestic price, from PW to [PD]1.
• Producers respond to price decrease by decreasing output, QS.
• In partial equilibrium analysis, a price decrease is expected to
result in an increase in consumption, QD.
Government collects tax revenue which is equal to the tax
rate, τ0, times the quantity exported, [QD ]1 - [QS]1.
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Economic effects of a specific export tax
Welfare analysis
Analyzing economic costs and income transfers
among producers, consumers, traders and the
government: the exporting country's perspective
Exporter's market
P
D
 [PW]1
τ0 PW
 [PD]1
Welfare analysis
Δ CS
+ (1)
Δ PS
- (1+2+3+4)
ΔG
+ (3+5)
S
5
1
2 3 4
Δ NSW - (2+4) + (3)
[QD]0 [QS]1[QD]1[QS]0
Q
5
Economic effects of a specific export tax
Economic interpretation of welfare areas
Area '1' represents the value gained by consumers that
is lost by producers, i.e., it is an income transfer from
the consumer to the producer.
Area '2' represents a part of the total value lost by the
producers that is not transferred to any other economic
agent in the economy; it is a "dead-weight loss" (DWL)
in consumption.
• The DWL in consumption is the cost to society of consuming
more the good in which the country has a comparative
disadvantage.
• The increased production reflects a misallocation of resources
because because prices have been distorted.
Area '3' represents the value lost by producers is gained
by government; it is an income transfer making up part
of the tax on the exportable good.
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Economic effects of a specific tariff
Area '4' represents part of the value lost by producers
that is not transferred to any other economic agent; it is
a "dead-weight loss" (DWL) in production.
• The DWL in production is the cost to society of producing less
of the exportable good, discouraging specialization in the good
in which the country has a comparative advantage.
• The decreased production reflects a misallocation of resources
in production as a result of distorted prices.
Area '5' represents revenue that is collected by the
government, along with area '3', from the tax; the total
revenue is (3+5) which is equal to {[PW]1 – [PD]1} ·
[QX]1; however, area '5' is an income transfer from the
importer to the government resulting from the TOT
effect of the tax (i.e., the policy-induced reduction in
supply by a large international seller that raised PW).
The net effect of the tax on exporting country is
uncertain because the negative DWLs can be offset by
the income transfer from the importing country.
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Economic effects of a specific export tax
Market analysis
Analyzing the production, consumption and trade
effects: the perspective of the importing country
Importer's domestic market
P
S
World market
PW
[PW]1
[PW]1
PW
PW
ES1
ES
ED
D
[QS]0 [QS]1 [QD]1[QD]0


Q
[QM]1 [QT]0

QT
8
Economic effects of a specific export tax
Economic intuition and expectations
Regardless of the reason a tax is applied, the result is a
reduction in the quantity supplied. (Graphically, ES
shifts to the left by the per unit rate of tax.) It is assumed
that the import-country government does not take any
policy action to counter the tax.
• The world price increases (PW) because a large seller on the
international market reduces export supply.
• The internal price in the importer’s market is the new world
price because no policy action has been taken.
Producers and consumers react to the change in the
domestic price, from PW to [PW]1.
• Producers respond to price increases by increasing output, QS.
• In partial equilibrium analysis, a price increase is expected to
result in a decrease in consumption, QD.
Because the import-country's government took no action,
there are no budgetary outlays on or revenues collected
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from the imported good.
Economic effects of a specific export tax
Welfare analysis
Analyzing economic costs and income transfers
among producers, consumers, traders and the
government: the importing country's perspective
Importer's market
S
P
d
[PW]1
PW
Welfare analysis
Δ CS
- (a+b+c+d)
Δ PS
+ (a)
ΔG
0
a
b c
D
[QS]0 [QS]1[QD]1[QD]0
Q
Δ NSW
- (b+c+d)
10
Economic effects of a specific export tax
Economic interpretation of welfare areas
Area 'a' represents the value lost by by consumers from
the higher price and that is gained by producers; it is an
income transfer from consumers to producers.
Area 'b' represents a part of the total value lost by the
consumer that is not transferred to any other economic
agent in the economy; it is a "dead-weight loss"
production.
• The DWL in production in the exporting country is the cost to
society of producing too little of the exportable good, the good
in which the country has a comparative advantage.
• The decreased production reflects a misallocation of resources
away from the export sector, stifling the specialization process.
Area 'c' represents the value lost by consumers that is gained
by the exporting-country's government; it is an income transfer
from the tax on consumers in the importing country to the
exporting-country's government; the transfer is a result of the
TOT effect.
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Economic effects of a specific export tax
Area 'c' represents a part of the value lost by the
consumers that is gained by the exporting-country's
government; it is an international income transfer that is
a result of the TOT effect of the tax.
Area 'd' represents a part of the value lost by the
consumers that is not transferred to any other economic
agent in the economy; it is the "dead-weight loss"
(DWL) in consumption.
• The DWL in consumption is the cost to society of consuming
too much of the importable good because the world price has
been distorted.
• The increased expenditures on imports reflects a misallocation
of resources (i.e., a sub-optimal consumption mix).
The net effect of the tax on the importing country is
negative, resulting in the DWLs and an income transfer
to the exporting country.
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Economic effects of a specific export tax
Net world welfare effects
Internal domestic transfers,
DWLs and international transfers
Δ NSW
Importer
Importer's market
P
Exporter's market
Exporter
P
S
D
d
[PW]1
PW
a
S
[PW]1
b c
5
PW
[PD]1
1
4
World
- (b+d)
- (c)
- (2+4)
+ (5)
(e) = (5)
- (b+d)
- (2+4)
2 3
D
[QS]0 [QS ]1[QD]1[QD]0
Q
[QD]0 [QD]1[QS]1 [QS]0
Q
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Economic effects of a specific export tax
Concluding comments
The export tax by a large country results in a TOT effect
that affects importers and exporters differently:
1. An increase in the world price benefits the exporting
country(ies) at the expense of the importing country(ies).
2. The lower domestic price in the exporting country is a subsidy
to domestic consumers/users which is paid by domestic producers.
3. The higher world price is a tax on import-country consumers,
but benefits producers in the import-competing sector.
4. Part of the revenue collected by the exporting-country's
government is an international income transfer from consumers in
the importing country, i.e, a tax by the exporter on the importer.
5. The net effect of the tax on the world economy is an
international income transfer and a series of DWLs in both the
importing and exporting country because prices have been
distorted.
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