Policy: Ecuador Imposition of a 25% tariff on all wheat imports

Numbers:

• Before the tariff, Ecuador imports 100,000 tons of wheat per year at a price of $200 per ton.
• The domestic wheat industry in Ecuador produces 50,000 tons of wheat per year at a cost of $250 per ton.
• The world price of wheat is $200 per ton. Evaluation:

Short-run Effects:

• The tariff will increase the price of imported wheat to $250perton(25$200), making it more expensive for Ecuadorian consumers.
• This will lead to a decrease in the demand for imported wheat, and an increase in the demand for domestically produced wheat.
• As a result, Ecuadorian wheat producers will increase their production to meet the increased demand, and the domestic industry will benefit from the tariff.

Long-run Effects:

• In the long run, the tariff may lead to an increase in the production capacity of the domestic wheat industry, as producers invest in new technology and increase their efficiency to meet the increased demand.
• However, the tariff may also lead to a decrease in consumer welfare, as they pay higher prices for wheat.
• Additionally, the tariff may lead to retaliation from other countries, which could harm Ecuador’s exports of other products.

Assumptions in the Model:

• The model assumes that the demand for wheat is elastic, meaning that a small change in price will lead to a large change in quantity demanded.
• The model assumes that the domestic wheat industry is perfectly competitive, meaning that there are many firms producing wheat and no single firm has market power.

Pros:

• The tariff will help to protect the domestic wheat industry and increase its production.
• The tariff will also generate revenue for the government, which can be used to support the domestic industry.

Cons:

• The tariff will lead to higher prices for consumers, which may reduce their welfare.
• The tariff may lead to retaliation from other countries, which could harm Ecuador’s exports of other products.
• The tariff may also lead to inefficiency, as domestic producers may not be as efficient as foreign producers, leading to a misallocation of resources.