Reasons for trade restrictions: restrict the import of demerit goods

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International Trade and Globalisation

6.2 Trade Restrictions – Reasons for Restricting Imports

Cambridge IGCSE Economics (0455) requires candidates to name **six** principal reasons why a government may limit imports. They are:

  1. Protect infant or sunset industries – give new or declining domestic firms time to become competitive.
  2. Prevent dumping – stop foreign producers selling below cost to drive out local competition.
  3. Reduce a current‑account deficit – lower import expenditure to improve the balance of payments.
  4. Raise tax revenue – use tariffs or import duties as a source of government income.
  5. Restrict demerit goods – limit imports of products that are harmful to health or the environment.
  6. Promote environmental sustainability – block goods that cause ecological damage (e.g., hazardous chemicals, non‑recyclable plastics).

Focus: Restricting the Import of Demerit Goods (6.2.5)

What are demerit goods?

Demerit goods are products that generate negative externalities – costs to individuals or society that are not reflected in the market price. In IGCSE terminology the market fails because Marginal Social Cost (MSC) = Marginal Private Cost (MPC) + external cost (E) exceeds the marginal private cost faced by producers and consumers.

  • Tobacco and cigarettes
  • Alcoholic beverages
  • Sugar‑sweetened drinks and confectionery
  • E‑cigarettes and vaping liquids
  • Hazardous chemicals (e.g., certain pesticides)

Why governments restrict their import

  1. Public‑health protection – lower consumption reduces disease prevalence and future health‑care costs.
  2. Internalising negative externalities – raising the price makes the market price approach the socially optimal level where MSC = Marginal Benefit (MB).
  3. Improving social welfare and productivity – a healthier workforce is more productive and contributes more to the economy.
  4. Revenue earmarking – duties can fund health‑promotion programmes, smoking‑cessation services, etc.
  5. International commitments – treaties such as the WHO Framework Convention on Tobacco Control require signatories to limit harmful imports.
  6. Environmental sustainability – many demerit goods (e.g., single‑use plastics, toxic chemicals) also create environmental externalities.

Link to Market Failure and Environmental Sustainability (6.5)

The restriction of demerit‑good imports is a classic example of government intervention to correct a market failure:

  • Market failure*: the market price reflects only the private cost (MPC) and ignores the external cost (E).
  • The government’s role is to internalise the externality, either by raising the price (tariff, tax) or by reducing the quantity supplied (quota, ban).
  • Because many demerit goods also cause environmental damage, the same intervention helps achieve the syllabus goal of “promoting environmental sustainability”.

Common Trade‑Restriction Instruments

Instrument How it works Effect on price Effect on quantity imported Typical use‑case
Import ban Legal prohibition of the product Effective price becomes infinite (no legal supply) Zero legal imports Highly hazardous chemicals, certain organophosphate pesticides
Import quota Fixed quantitative limit each year Domestic price rises to the quota‑binding level Limited to the quota amount Alcoholic beverages, tobacco
High tariff Duty added to the import value (t) Effective price = world price (Pw) + t Quantity falls but is not eliminated (Qw → Qt) Sugar‑sweetened drinks, e‑cigarettes
Technical standards & labelling Mandatory health warnings, packaging, or certification Price rises by compliance costs Imports may fall if firms cannot meet the standards High‑caffeine drinks, alcoholic beverages
Subsidies for domestic alternatives Financial support to local producers of healthier substitutes Domestic substitutes become cheaper relative to the imported demerit good Import demand shifts leftward Low‑sugar beverages competing with imported sodas

Quantitative Illustration (Tariff Example)

Assume:

  • World price of imported cigarettes = $5 per pack (Pw)
  • Government imposes a 40 % tariff → t = $2 per pack
  • Domestic demand at $5 = 100 million packs; at $7 = 60 million packs

Result:

  • Effective price to consumers = $5 + $2 = $7
  • Import quantity falls from 100 million to 60 million packs
  • Tariff revenue = $2 × 60 million = $120 million (which can be earmarked for health programmes)

Economic Rationale – The Negative‑Externality Framework

In a free market the equilibrium for a demerit good is where Marginal Private Cost (MPC) = Marginal Benefit (MB). Because the external cost (E) is omitted, the market quantity (Qm) exceeds the socially optimal quantity (Qs).

Socially optimal equilibrium:
MSC (= MPC + E) = MB (or, equivalently, the supply curve shifts upward by the amount of E).

Trade restrictions raise the effective price faced by consumers, moving the quantity demanded closer to Qs. In diagrammatic terms:

  • Draw the world‑price line (Pw) and domestic supply (S) and demand (D) curves.
  • A tariff lifts the price to Pw + t, reducing imports from Qw to Qt.
  • The new price more closely reflects the full social cost (MSC).

Broader Consequences of Trade Restrictions

  • Consumers – higher prices and reduced choice; possible welfare loss, especially for low‑income groups.
  • Domestic producers – may gain market share and profit, but can become less efficient without competition.
  • Government revenue – tariffs generate income; bans generate no revenue but may save future health costs.
  • Balance of payments – lower import bill improves the current account, but retaliation could hurt exports.
  • International relations – restrictions can provoke WTO disputes or retaliatory measures.
  • Enforcement costs – monitoring, customs checks, and legal processes require resources.

Link to Other Syllabus Points

Understanding demerit‑good restrictions connects directly to:

  • 6.2.1‑6.2.3 – environmental sustainability (e.g., banning hazardous chemicals, plastic‑product restrictions).
  • 6.4 – balance of payments (import reduction improves the current account).
  • 6.5 – the role of government in correcting market failure (negative externalities, environmental externalities).

Evaluation – Advantages and Disadvantages (AO3)

Advantages (Pros) Disadvantages (Cons)
  1. Reduces consumption of harmful products → lower disease rates and long‑term health‑care costs (demonstrates understanding of externalities – AO2).
  2. Internalises the external cost, moving the market toward the socially optimal outcome (application of economic theory – AO2).
  3. Tariff revenue can be earmarked for public‑health programmes, creating a “double dividend” (evaluation of fiscal policy – AO3).
  4. Helps meet international obligations (e.g., WHO tobacco‑control treaty).
  1. May stimulate black‑market activity or smuggling, undermining the health objective (recognises unintended consequences – AO3).
  2. Higher prices are regressive – low‑income consumers spend a larger share of income on these goods.
  3. Risk of retaliation from trading partners, potentially hurting unrelated export sectors and worsening the balance of payments.
  4. Administrative and compliance costs for businesses and customs authorities.
  5. Domestic producers might become complacent without competitive pressure.

Real‑World Examples

  • Australia – 70 % import tariff on tobacco keeps the retail price above AU$30 per pack.
  • India (2021) – ban on the import of certain organophosphate pesticides to protect farmers and the environment.
  • European Union – Regulation 1169/2011 requires health warnings on imported alcoholic beverages, raising compliance costs.
  • South Africa (2022) – 20 % tariff quota on sugary drinks to curb obesity rates.
  • New Zealand – ban on single‑use plastic cutlery imported from overseas (environmental sustainability).

Suggested Diagram for Exams

Draw a standard supply‑and‑demand diagram for an imported demerit good:

  1. Horizontal line at world price Pw (price of imports without any restriction).
  2. Domestic supply curve (S) upward sloping; domestic demand curve (D) downward sloping.
  3. Import gap = distance between S and D at Pw (label as Qw).
  4. Introduce a tariff t: shift the effective price line up to Pw + t. Show the new import gap (Qt).
  5. Shade the tariff‑revenue rectangle (height = t, width = Qt).
  6. Indicate dead‑weight loss triangles: one representing lost consumer surplus, the other representing the external cost that has now been partially internalised.
  7. Label the socially optimal quantity where MSC = MB (optional for higher‑level answers).

Key Points to Remember for the Exam (AO1‑AO3)

  1. Define a demerit good and explain the negative externality it creates (AO1).
  2. State the main objective of restricting its import – protecting health, internalising external costs, and supporting environmental sustainability (AO2).
  3. Identify at least two restriction tools (e.g., high tariff, quota, ban) and describe how each changes price and quantity (AO2).
  4. Use the negative‑externality diagram or a tariff supply‑and‑demand diagram to illustrate the economic effect (AO2).
  5. Provide a balanced evaluation: discuss health benefits, revenue gains, and possible drawbacks such as black markets, regressive impacts, trade retaliation, and enforcement costs (AO3).
  6. Recall the other five reasons for trade restrictions so you can answer any “list all reasons” question (AO1).

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