IB DP Economics: Types of trade protection

This study guide follows the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. It covers sub-topic 4.2, Types of trade protection. Tariffs, quotas, subsidies (including export subsidies) and administrative barriers are SL and HL. The calculations of effects on stakeholders, worked from a diagram, are HL only, and they are marked that way below.

The guide sets tariffs, quotas and subsidies at an evaluation and skills depth (AO3 and AO4), and administrative barriers at an evaluation depth (AO3). Every figure below is invented: the countries, goods and prices are fictional.

Use this page with the revision notes and the practice questions. The course page is the IB DP Economics hub, and the printable checklist lets you tick off each outcome. To find weak spots first, try the free 10-minute diagnostics. The free-trade diagrams you build on are in benefits of international trade.

What 4.2 asks of you

Outcome	What you do	Level
Tariff	Draw the diagram and show the effect on price, production, consumption, expenditure, revenue and welfare	SL and HL
Quota	Draw the diagram and show the same effects	SL and HL
Subsidy and export subsidy	Draw the diagram and show the same effects	SL and HL
Administrative barriers	Explain standards and regulations as protection	SL and HL
Stakeholder calculations	Read a diagram and work out the effect on each group, for a tariff, quota or subsidy	HL only

The guide asks for correctly labelled, clearly drawn diagrams where they are appropriate, so treat the diagram skill as the core of this page.

The set-up that every diagram shares

All the diagrams use one market, one world price and one domestic demand and supply pair. Put price up the vertical axis and quantity along the horizontal axis.

• D is domestic demand and S is domestic supply.
• Pw is the world price. Under free trade, domestic buyers and sellers face Pw.
• If Pw is below the no-trade price, the country imports the gap between quantity demanded and quantity supplied.
• The diagrams assume the country is a price taker, so its own trade policy does not change Pw. This is a modelling choice, not a fact about every economy.

Surplus ideas carry over from competitive market equilibrium. Welfare here means consumer surplus plus producer surplus plus government revenue.

Fictional market for the worked examples: shirts in Brandovia. Quantities are in thousands, and prices are in currency units.

• Demand: Qd = 180 − 3P
• Supply: Qs = 4P − 30
• No-trade equilibrium: 180 − 3P = 4P − 30, so 210 = 7P, giving P = 30 and Q = 90.
• World price: Pw = 20.

At Pw = 20, Qd = 180 − 60 = 120 and Qs = 80 − 30 = 50. Imports are 120 − 50 = 70. Import expenditure is 20 × 70 = 1 400.

Tariffs

A tariff is a tax on imported goods. A specific tariff is a fixed amount per unit. An ad valorem tariff is set as a share of the import’s value: 25% of a world price of 20 is 5 per unit. Either way, the domestic price of the imported good becomes Pw plus the tariff.

Reading the tariff diagram

Draw a second horizontal line above Pw at Pw + t, labelled Pt. Four quantities now matter:

Label	Meaning	Brandovia value
Qs under free trade	Domestic output before the tariff	50
Qs with tariff	Domestic output after the tariff	70
Qd with tariff	Domestic consumption after the tariff	105
Qd under free trade	Domestic consumption before the tariff	120

Effects, in the order the guide lists them:

1. Price. Rises from Pw to Pt, because importers pass the tax on.
2. Production. Domestic output rises along S, from 50 to 70. Higher prices make more domestic supply worthwhile.
3. Consumption. Falls along D, from 120 to 105.
4. Imports. Fall from 70 to 35, so the gap between the two new quantities is the new import volume.
5. Expenditure. Consumers spend Pt × Qd. Spending on imports splits into payments to foreign sellers and tax paid to the government.
6. Revenues. Domestic producers receive Pt on every unit. The government collects t on every imported unit.
7. Welfare. Consumer surplus falls by a trapezoid between Pw and Pt. Producer surplus rises. The government gains revenue. Two triangles are lost to everyone.

Label the areas on your diagram:

Area	Shape	What it is
a	Trapezoid beside S, between Pw and Pt	Gain in producer surplus
b	Triangle between S and the Pt line	Welfare loss from inefficient extra domestic production
c	Triangle between D and the Pt line	Welfare loss from reduced consumption
d	Rectangle between the new quantities	Government revenue

The consumer surplus loss is a + b + c + d.

Worked example (HL only): Brandovia tariff of 5

A tariff of 5 per shirt is imposed. Then Pt = 25.

1. New quantities: Qd = 180 − 75 = 105 and Qs = 100 − 30 = 70. Imports = 105 − 70 = 35.
2. Government revenue = 5 × 35 = 175.
3. Consumer surplus loss = ½ × (120 + 105) × 5 = 562.5.
4. Producer surplus gain = ½ × (50 + 70) × 5 = 300.
5. Welfare loss, production triangle = ½ × 5 × (70 − 50) = 50.
6. Welfare loss, consumption triangle = ½ × 5 × (120 − 105) = 37.5.
7. Check: 300 + 175 + 50 + 37.5 = 562.5, which equals the consumer loss.
8. Net welfare change = 300 + 175 − 562.5 = −87.5, the same as −(50 + 37.5).

Spending changes too. Consumers spend 25 × 105 = 2 625 instead of 2 400. Domestic producers’ revenue rises from 1 000 to 25 × 70 = 1 750. Of the 875 spent on imports, 175 is tax and 700 goes to foreign sellers, down from 1 400.

Quotas

An import quota sets a ceiling on the units of a good allowed in during a set period. The government may allocate the right to import by licence. Because supply from abroad is capped, the domestic price rises until domestic buyers want exactly the quota quantity beyond what domestic firms supply.

Quota diagram

Keep D, S and Pw. Draw the quota as a horizontal gap of fixed width between S and D. Slide that gap up until it fits between the two curves. The price at which it fits is the new domestic price, Pq. Mark the quota quantity as the width of that gap.

Effects on price, production and consumption match a tariff of the same size. The difference is the rectangle d. A tariff pays it to the government. Under a quota it is quota rent: the gap between Pq and Pw on every imported unit, collected by whoever holds the import licences.

Worked example (HL only): Brandovia quota of 35

Limit imports to 35. Find the price where Qd − Qs = 35.

1. 180 − 3P − (4P − 30) = 35, so 210 − 7P = 35 and 7P = 175, giving P = 25.
2. Qd = 105 and Qs = 70, so imports are 105 − 70 = 35. The quota binds.
3. Quota rent = (25 − 20) × 35 = 175.
4. Consumer loss, producer gain and the two triangles are the same as for the tariff: 562.5, 300, 50 and 37.5.

The quota gives the same outcome as a tariff of 5. The only difference is who holds the 175. Domestic importers who hold the licences keep it in the country, as private income. If foreign sellers hold the licences, it leaves the country. Net welfare change for the country is then −87.5 minus 175 = −262.5.

A second difference: with a tariff the price gap is set and the import quantity adjusts. With a quota the import quantity is set and the price adjusts. If demand rises, imports increase under a tariff but not under a quota.

Subsidies and export subsidies

A subsidy is a government payment made to producers, usually per unit. In trade, two cases matter.

Subsidy to domestic producers (competing with imports)

The subsidy shifts S down by the amount of the subsidy, equivalent to a shift right. Consumers still buy at Pw, since imports are available at that price. Producers receive Pw plus the subsidy per unit.

Effects: consumer price unchanged, domestic production up, imports down, consumption unchanged. Government spending equals the subsidy times the new output.

Worked example (HL only): Brandovia subsidy of 5 per shirt

1. Producers receive 20 + 5 = 25, so Qs = 100 − 30 = 70. Consumers still pay 20, so Qd = 120.
2. Imports = 120 − 70 = 50, down from 70. Import expenditure falls from 1 400 to 1 000.
3. Government cost = 5 × 70 = 350.
4. Producer surplus gain = ½ × (50 + 70) × 5 = 300.
5. Consumer surplus is unchanged.
6. Net welfare change = 300 − 350 = −50. This equals the production triangle, ½ × 5 × (70 − 50) = 50.

Output reaches the same 70 as under the tariff, but consumers are not hurt. Taxpayers pay instead.

Export subsidy

An export subsidy is a payment on each unit sold abroad. Take the fictional grain market of Tessaly. Demand is Qd = 100 − 2P and supply is Qs = 3P − 20, in thousand tonnes. The world price is 30.

• Free trade: Qd = 100 − 60 = 40 and Qs = 90 − 20 = 70. Exports are 30.
• With a subsidy of 5, exporters earn 35 on every unit exported, so they will not sell at home for less. The domestic price rises to 35.
• New quantities: Qd = 100 − 70 = 30 and Qs = 105 − 20 = 85. Exports rise to 85 − 30 = 55.

HL only calculation:

1. Government cost = 5 × 55 = 275.
2. Consumer surplus loss = ½ × (40 + 30) × 5 = 175.
3. Producer surplus gain = ½ × (70 + 85) × 5 = 387.5.
4. Net welfare change = 387.5 − 175 − 275 = −62.5.
5. Check with the triangles: ½ × 5 × (85 − 70) = 37.5 and ½ × 5 × (40 − 30) = 25, which sum to 62.5.

Home consumers pay more, producers gain, and taxpayers fund the subsidy.

Administrative barriers

The guide names standards and regulations here, at an evaluation depth. These are non-tax rules that make it harder or dearer to sell an imported product. Examples of such rules:

• A labelling rule that requires packaging in the local language.
• A safety standard, tested in domestic laboratories.
• A licence that importers must hold.
• Slow customs paperwork or inspections at the border.

Each raises the cost of selling the import or limits how much can be sold. If the extra cost is per unit, the diagram looks like a tariff. The difference is that nobody collects revenue: the money is spent on testing, paperwork or waiting.

Worked example: Brandovia compliance cost of 4

Importers must pay 4 per shirt for local testing, so the consumer price becomes 24.

1. Qd = 180 − 72 = 108 and Qs = 96 − 30 = 66. Imports = 42.
2. Compliance spending = 4 × 42 = 168, which is a pure cost and not revenue to anyone.
3. Every unit sold still costs consumers 24, and domestic producers gain from the higher price, as with a tariff of 4. The difference is that the 168 pays for compliance and goes to no one as income.

Evaluation matters because a standard can have two purposes. It may protect buyers from unsafe or misleading products. It may also shelter domestic firms. A good answer weighs how well the rule achieves a genuine goal against how much it restricts trade, and whether a less restrictive rule would do the job. Reasons for trade control belong to sub-topic 4.3.

Common errors

• Shading the tariff revenue as a triangle. It is a rectangle: tariff per unit times imports after the tariff.
• Using free-trade imports to find revenue. Use the smaller import figure after the tariff.
• Forgetting that a producer subsidy leaves the consumer price unchanged in the import-competing case.
• Putting the quota rent in the government’s pocket without saying who holds the licences.
• Drawing an export subsidy as a shift in demand. It is a payment to producers.
• Leaving out axes, curves, Pw or Pt.

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).