1The idea in one paragraph

A government that wants its own producers to sell more has four tools. It can tax the imports, cap the imports, pay its own firms, or bury the imports in paperwork. All four raise home production and cut imports, so on that score they look alike. They part company over three things: what happens to the price buyers pay, whether the government collects money or spends it, and who walks away with the difference. Learn the four pictures, then learn to read the areas on them, because the areas are where the marks are.

2The picture before any protection

One market carries this whole unit: rice in Calvera. Calvera's own supply and demand would meet at $375 a tonne, but the world price is $200, and Calvera is small enough that its buying does not move that price. At $200, Calveran farmers grow 20 thousand tonnes a year, Calverans eat 90 thousand, and the 70 thousand in between comes in as imports.

Two areas on that picture matter from here on.

Consumer surplus is the gap between what buyers were willing to pay and what they actually paid, added up across everyone who bought. On the diagram it is the area under the demand curve and above the price line. Producer surplus is the gap between the lowest price a seller would have accepted and what they got, added up: the area above the supply curve and below the price line. Together they are the welfare this market delivers to Calvera.

Every barrier in this unit does the same three things to Figure 1. It pushes the price line up or the supply curve out, it makes the consumer surplus triangle smaller or leaves it alone, and it hands most of what consumers lose to somebody else. The part that reaches nobody is the part economists call a loss.

3Tariffs

A tariff is a tax on an imported good, charged at the border, normally as a fixed amount per unit. Calvera puts $100 a tonne on imported rice.

Read Figure 2 in five steps, in this order, every time.

The price rises to the world price plus the tariff, $300. A foreign exporter still needs $200 for itself and now owes $100 at the border, so it asks $300. Home growers, who owe the border nothing, simply charge $300 as well, because they can.

Domestic production rises, 20 to 40. This is a movement up the domestic supply curve. Farms that could not cover their costs at $200 can cover them at $300.

Domestic consumption falls, 90 to 70. A movement up the demand curve. Nothing shifted; the price changed.

Imports are squeezed from both ends, 70 down to 30. Home output took 20 thousand tonnes of the market and buyers gave up another 20 thousand.

The government collects the tariff on what still comes in: $100 a tonne on 30 thousand tonnes.

Now the money, because the guide asks for expenditure and revenue by name.

Calverans now spend more in total ($21m against $18m) and eat less rice. That is the sentence to write down.

Figure 3 cuts the change into the four areas an examiner expects to see lettered.

a is producer surplus gained. Home growers get $100 more on every tonne they were already growing, and profit on the extra tonnes as well. It is a transfer: consumers lost it, producers got it, and it never left Calvera.

b is a welfare loss on production. Tonnes 20,000 to 40,000 now come from Calveran farms that use more of Calvera's land and labour per tonne than the $200 it costs to buy the same rice abroad. The difference is real resources burned, and nobody receives it.

c is government revenue. Another transfer: from Calveran buyers to the Calveran state, available to spend on anything the state spends money on.

d is a welfare loss on consumption. Twenty thousand tonnes that people valued above $200 and gave up because the price was $300. The value they lost is collected by nobody.

Add them and you have the whole of the consumer surplus lost: a + b + c + d. Of that, a and c are transfers inside the country. Only b + d is gone, and that pair is the welfare loss, sometimes called the deadweight loss.

Who is affected, in the language of the question:

• Domestic producers gain output, revenue and surplus. Jobs in the industry are more secure.
• Domestic consumers lose on both counts: higher price, smaller quantity.
• The government gains $3m it did not have.
• Foreign producers lose. They sell 30 instead of 70, and still receive only $200 a tonne, since the whole tariff goes to Calvera's treasury.
• The country as a whole is down $2m in this model.
• Firms that use rice as an input, such as Calveran noodle makers, face a higher input price and may cut output themselves. A tariff on an input is a tax on every industry downstream of it, and strong answers say so.

5Quotas

A quota is a physical limit on how much of a good may be imported in a given period. Calvera scraps the tariff and allows 30 thousand tonnes of rice in each year, and no more.

Above the world price, the total that can be supplied to Calvera is what Calveran farms supply plus the 30 thousand tonnes the quota allows. That is the line marked S + quota, which is the domestic supply curve moved 30 thousand tonnes to the right. It meets demand at $300.

Why does the price rise at all? Because at $200 Calverans want 90 thousand tonnes and only 50 thousand exist for them: 20 grown at home and 30 let in. Something has to give, and it is the price. It climbs until what buyers want matches what is available, which happens at $300, where farms make 40, the quota brings 30, and buyers take 70.

Look at that list again. It is Figure 2's list, exactly. The same price, the same domestic output, the same consumption, the same imports. So the areas are the same too: a is still the $3m producer gain, b and d are still the two $1m losses, and c is still a $3m rectangle a hundred dollars tall and thirty thousand tonnes wide.

One thing has changed, and it is the thing examiners ask about.

A quota raises the same money as the tariff that matches it, and the government does not collect a penny of it.

Somebody collects it. Whoever holds the right to bring those 30 thousand tonnes in buys at $200 and sells at $300, and keeps $100 a tonne for doing nothing but holding a licence. Three arrangements are common, and they lead to different answers, so name the one you are assuming:

• Foreign exporters hold the right. Then the $3m leaves Calvera altogether, and the country is worse off by the whole of c on top of b and d.
• Domestic importers hold licences given out free. The $3m stays in Calvera but in private hands, not the treasury, and firms spend real money lobbying for licences.
• The government auctions the licences. Then it captures c after all, and the quota and the tariff come to very nearly the same thing.

Two further differences are worth a sentence each in an evaluation. A quota fixes the quantity, so if Calveran demand grows, the price climbs further and home producers take the whole of the growth; under a tariff, imports would have grown with demand. And a quota needs administering: licences, inspectors, records, and the lobbying that comes with anything valuable handed out by officials.

7Subsidies

A subsidy is a payment from the government to producers for each unit they make. The guide names two uses of it: a production subsidy paid to domestic firms competing with imports, and an export subsidy paid on units sold abroad.

Calvera drops the tariff and instead pays its rice farmers $100 for every tonne they grow.

The supply curve shifts down by the subsidy, which is the same as shifting it right. A farm that needed $300 a tonne to supply the forty-thousandth tonne now needs only $200 from the buyer, because the state supplies the other $100.

Then comes the step students get wrong. The price does not change. Calvera is small, the world will sell it all the rice it wants at $200, and nothing Calvera does to its own farmers changes that. So buyers keep paying $200 and keep taking 90 thousand tonnes. Farms produce 40 instead of 20, and imports fall from 70 to 50.

Who is affected:

• Consumers are untouched. Same price, same quantity, no consumer surplus lost at all. This is the subsidy's headline advantage over the tariff.
• Producers receive $300 a tonne, $200 from the buyer and $100 from the state, and gain area a, $3m of producer surplus.
• Taxpayers pay the bill: $100 on every one of the 40 thousand tonnes grown.
• Foreign producers sell 50 thousand tonnes instead of 70.

Set the tariff and the subsidy side by side, because a part (b) that does this earns evaluation marks. Both lift domestic output from 20 to 40. The subsidy does it without raising the price, so there is no lost consumer surplus and no triangle d; and it cuts imports by less, 70 to 50 rather than 70 to 30. In exchange the bill lands on taxpayers rather than on buyers, and the tax that pays for it has costs of its own somewhere else in the economy. Which of those you prefer is a judgement about who should pay, not a fact about which diagram is right.

Now the export subsidy, which works on a market the country sells into rather than buys from. Calvera's wheat is the example: the world price is $300, Calvera's own supply and demand would have met at $200, so Calvera exports. The government pays growers $50 for every tonne they export.

A grower who can earn $300 abroad plus $50 from the state will not sell at home for less than $350, so the domestic price rises to $350 even though nothing happened to the world price. Home buyers take 25 thousand tonnes instead of 30. Output rises from 50 to 55. Exports rise from 20 to 30, and taxpayers pay $50 × 30,000 = $1.5m.

The pattern of winners is different again. Calveran growers gain. Calveran bread eaters lose, paying more for less. Calveran taxpayers pay. Foreign buyers gain, because they get wheat partly paid for by somebody else's taxpayers. And foreign growers competing with that wheat lose, which is why export subsidies draw complaints and countermeasures faster than any other barrier in this unit. Section 4.3 picks that argument up under anti-dumping and unfair competition.

8Administrative barriers: standards and regulations

An administrative barrier is a rule that makes importing slower, dearer or harder without taxing it or capping it. The guide lists standards and regulations by name, and there is no diagram to learn. What you must be able to do is trace the chain from the rule to the price.

Take Calvera again. Every imported batch of rice must be tested in a Calveran laboratory, labelled in both national languages, and cleared through one port in the north. A Doravian exporter now pays for testing, reprints its packaging, and holds stock at the border for three weeks. Say that adds $40 a tonne.

The chain runs: the rule raises the foreign firm's cost per tonne, so it supplies less to Calvera at every price, so the price in Calvera rises and Calveran farms sell more. In its effect on the market it is a tariff. In one respect it is worse than a tariff, and this is the point worth making: nobody collects the $40. There is no rectangle c. The money is spent on laboratories, printing and waiting lorries. A tariff takes money from buyers and hands it to the state; an administrative barrier takes the same money from buyers and burns it.

The reason this line is marked AO3 rather than AO1 is that the same rule can be two things at once. A limit on pesticide residues protects the people who eat the rice and shuts out growers who cannot meet it, and nothing in the text of the rule says which purpose it was written for. Three things are fair to say in an evaluation.

They are hard to challenge. A tariff has a rate and a line in a budget. A standard looks like ordinary domestic regulation, and a country accused of using one as protection can answer that it is protecting its citizens.

They are hard to measure. You cannot put a number on the diagram the way you can with a tariff, so the cost to consumers is real but invisible, which makes the policy politically cheap.

They fall hardest on the smallest exporters. A large firm can afford a compliance department. A grower in an economically least developed country often cannot, and is shut out by the cost of proving its rice is safe rather than by the rice being unsafe.

Against all that: some standards are exactly what they claim to be. Refusing to take food that fails a safety test is not protection, and a student who treats every regulation as a disguised tariff has stopped evaluating.

10The four instruments side by side

When a question hands you a barrier you were not expecting, ask three questions in this order and the answer writes itself.

What happens to the price buyers pay? Up, for a tariff, a quota and an administrative barrier. Unchanged, for a production subsidy in a small country. Up, for an export subsidy, even though the country is selling.

What happens to the government's budget? It gains under a tariff. It gains nothing under a quota, unless it auctions the licences, and nothing at all under an administrative barrier. It pays under either kind of subsidy.

Who ends up with the transfer? Producers under all four. Plus the state under a tariff, plus licence holders under a quota, plus nobody at all under an administrative barrier, where the money is consumed by the compliance itself.