IB DP Economics: Types of trade protection – Revision Notes

These revision notes follow the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. They cover sub-topic 4.2, Types of trade protection. Tariffs, quotas, subsidies, export subsidies and administrative barriers are SL and HL. The calculations of effects on stakeholders from a diagram are HL only.

For full explanations and worked diagrams, read the study guide. To test yourself, use the practice questions. The course page is the IB DP Economics hub and the printable checklist tracks each outcome. For a quick check of weak areas, take the free 10-minute diagnostics. The earlier free-trade diagrams are in benefits of international trade.

All figures are fictional.

Definitions to know

Term	Meaning
Tariff	A tax on imported goods. Specific: a fixed sum per unit. Ad valorem: a share of the import’s value
Quota	A legal ceiling on the units of a good allowed in
Quota rent	The price gap (domestic price minus world price) times the quota quantity, collected by licence holders
Subsidy	A government payment made to producers, usually per unit of output
Export subsidy	A payment per unit sold abroad
Administrative barrier	A standard, regulation, licence or procedure that makes importing harder or dearer
Welfare loss	The triangles of surplus that nobody gains when protection distorts output and consumption

The depth the guide sets

• Tariffs, quotas and subsidies: AO3 and AO4. You evaluate and you use diagram skills.
• Administrative barriers (standards and regulations): AO3.
• Stakeholder calculations from a diagram: AO4, HL only.
• Command terms such as “draw”, “label”, “show that” and “calculate” belong to the skills objective. “Calculate” means a numerical answer with the working shown.

Diagram checklist

Every diagram needs the following. Mark each as you draw.

1. Axes: price (vertical) and quantity (horizontal).
2. Domestic demand D and domestic supply S, labelled.
3. World price Pw as a horizontal line.
4. The policy line or shifted curve: Pw + tariff, quota price, or Pw + subsidy.
5. Four quantities for a tariff (Qs and Qd, before and after). Name them.
6. Shaded and labelled areas for consumer loss, producer gain, revenue and welfare loss.
7. A short note stating what happened to price, production, consumption and imports.

Methods in steps

Tariff or quota (HL only calculation)

1. Find Qd and Qs at Pw. Imports = Qd − Qs.
2. Find the new domestic price: Pw + t for a tariff; for a quota, solve Qd − Qs = quota.
3. Find Qd and Qs at the new price. New imports = Qd − Qs.
4. Revenue (tariff) = t × new imports. Quota rent = (new price − Pw) × quota.
5. Consumer loss = ½ × (old Qd + new Qd) × price rise.
6. Producer gain = ½ × (old Qs + new Qs) × price rise.
7. Welfare loss = ½ × price rise × (new Qs − old Qs) + ½ × price rise × (old Qd − new Qd).
8. Check: consumer loss = producer gain + revenue + welfare loss.

Producer subsidy, import-competing market (steps 3 to 5 are HL only calculations)

1. Producers receive Pw + s. Find the new Qs. Consumers still pay Pw, so Qd does not change.
2. New imports = Qd − new Qs.
3. Government cost = s × new Qs.
4. Producer gain = ½ × (old Qs + new Qs) × s.
5. Net welfare change = producer gain − cost, which equals −½ × s × (new Qs − old Qs).

Export subsidy (steps 3 and 4 are HL only calculations)

1. Domestic price rises to Pw + s.
2. New Qd and Qs at that price. Exports = Qs − Qd.
3. Cost = s × exports. Consumer loss and producer gain are trapezoids over the price rise s.
4. Net = producer gain − consumer loss − cost.

Worked reminder: Lorvan

Fictional market for headphones in Lorvan. Demand Qd = 140 − 2P, supply Qs = 3P − 10, in thousands. Pw = 20.

At Pw: Qd = 100, Qs = 50, imports = 50.

Tariff of 4 (HL only)

Step	Working	Result
New price	20 + 4	24
New quantities	Qd = 140 − 48; Qs = 72 − 10	92 and 62
New imports	92 − 62	30
Revenue	4 × 30	120
Consumer loss	½ × (100 + 92) × 4	384
Producer gain	½ × (50 + 62) × 4	224
Welfare loss	½ × 4 × 12 + ½ × 4 × 8 = 24 + 16	40
Check	224 + 120 + 40	384

Quota of 30 (rent is an HL only calculation): solve 140 − 2P − (3P − 10) = 30, so 150 − 5P = 30 and P = 24. Same quantities as the tariff. Quota rent = 4 × 30 = 120.

Producer subsidy of 4 (cost and welfare are HL only): producers receive 24, so Qs = 62. Consumers pay 20 and buy 100. Imports = 38. Cost = 4 × 62 = 248. Producer gain = ½ × (50 + 62) × 4 = 224. Net = 224 − 248 = −24.

Export subsidy (HL only): fictional tea market in Sunmar. Qd = 120 − 2P, Qs = 3P − 30, Pw = 36. Free trade: Qd = 48, Qs = 78, exports 30. A subsidy of 3 per unit exported lifts the domestic price to 39. Then Qd = 42, Qs = 87 and exports are 45. Cost = 3 × 45 = 135. Consumer loss = ½ × (48 + 42) × 3 = 135. Producer gain = ½ × (78 + 87) × 3 = 247.5. Net = 247.5 − 135 − 135 = −22.5.

Who gains and loses from a tariff

Stakeholder	Effect	Why
Domestic consumers	Lose	Higher price, lower consumption
Domestic producers	Gain	Higher price, higher output
Government	Gains revenue	Tax on each import
Foreign producers	Lose	Sell fewer units to this market
The country as a whole	Net loss in this model	Two triangles are lost

Whether the net loss is the whole story is a question for arguments for and against protection, where jobs, security and infant industries are weighed.

Must-know distinctions

Compare	Tariff	Quota
What is fixed	The price gap	The import quantity
Who gets area d	Government	Licence holders
If demand rises	Imports rise	Imports stay capped

Compare	Tariff	Producer subsidy
Consumer price	Rises	Unchanged
Who pays	Consumers	Taxpayers
Government budget	Gains revenue	Pays out

Compare	Tariff	Administrative barrier
Revenue	Collected by government	Nobody collects it
Cost to society	Triangles of lost surplus	Triangles plus resources spent on compliance
Evaluation point	Clearly a trade tool	May also serve safety or consumer protection

Evaluating administrative barriers

• A rule can protect health, safety or consumers, so removing it is not automatically a gain.
• The same rule may be written so that only foreign producers struggle to meet it.
• Ask whether a less restrictive rule would reach the same goal.
• Ask who pays: buyers through higher prices, importers through compliance costs.
• Government revenue is absent, unlike a tariff.

Turning a question into a diagram

• “Explain the effect of a tariff”: draw the tariff diagram, then describe price, production, consumption and imports in words. The diagram alone is not an explanation.
• “Calculate”: work from the quantities and prices given. Show every line, with units.
• “Evaluate” or “discuss” a tool: give effects on each stakeholder, then weigh them. Consumers, producers, government and foreign sellers all appear.
• A percentage tariff: convert it to a per-unit sum first, using the world price.
• A quota stated in units: solve for the price that makes imports equal the quota.

Quick self-test

Use the Lorvan market: Qd = 140 − 2P, Qs = 3P − 10, Pw = 20, quantities in thousands.

1. Define an import quota.
2. A tariff of 6 is imposed. What is the new domestic price?
3. State domestic production and consumption at that price.
4. How many units are imported?
5. Calculate government revenue. (HL only)
6. Calculate the fall in consumer surplus. (HL only)
7. Calculate the gain in producer surplus. (HL only)
8. Calculate the net change in welfare. (HL only)
9. A 15% ad valorem tariff applies to a good whose world price is 30. State the tariff per unit and the domestic price.
10. State why an administrative barrier raises no government revenue.
11. A quota of 30 is set. State the domestic price and the quota rent. (HL only)

Answers

1. A legal ceiling on the units of a good allowed in during a period.
2. 20 + 6 = 26.
3. Qs = 78 − 10 = 68. Qd = 140 − 52 = 88.
4. 88 − 68 = 20.
5. 6 × 20 = 120.
6. ½ × (100 + 88) × 6 = 564.
7. ½ × (50 + 68) × 6 = 354.
8. Welfare loss = ½ × 6 × 18 + ½ × 6 × 12 = 54 + 36 = 90. Check: 354 + 120 − 564 = −90.
9. 15% × 30 = 4.5 per unit. Domestic price = 34.5.
10. The cost is spent on compliance, testing or delay, and not paid to government.
11. Solve 140 − 2P − (3P − 10) = 30, giving P = 24. Rent = (24 − 20) × 30 = 120.

Where marks are usually lost

• Calculating revenue with the free-trade import figure instead of the smaller figure after the tariff.
• Calling the revenue rectangle a triangle, or leaving it out of the welfare sum.
• Giving a quota price effect but forgetting to say who gets the rent.
• Describing a producer subsidy as raising the consumer price.
• Stating that “everyone gains” from protection. Consumers and taxpayers lose, and a good answer names them.
• Drawing the diagram without Pw, the new price line or the quantities.
• Using the trapezoid formula with the wrong two quantities. Take the old and new values on the same curve.
• Treating a standard as protectionist without considering any safety purpose it may serve.
• Writing “calculate” answers without showing the working.

Official syllabus

Source: IB Diploma Programme Economics guide, first assessment 2022, published by the International Baccalaureate Organization in February 2020. Sub-topic 4.2, Types of trade protection (includes HL only calculations).