International Trade - Theory and Policy, 2010a

Mexico, and all wheat sold in Mexico must be sold at the same price. Since a tax is collected at the border,
the only way for these price equalities within countries to arise is if the price differs across countries by
the amount of the tax.
The second condition states that the amount the United States wants to export at its new lower price must
be equal to the amount Mexico wants to import at its new higher price. This condition guarantees that
world supply of wheat equals world demand for wheat.
The export tax equilibrium is depicted graphically in Figure 7.37 "Depicting an Export Tax Equilibrium: Large
Country Case". The Mexican price of wheat rises from PFT to PMexT, which reduces its import demand
from QFT to QT. The U.S. price of wheat falls from PFT to PUST, which reduces its export supply also
from QFT to QT. The difference in the prices between the two markets is equal to the export tax rate T.
Figure 7.37 Depicting an Export Tax Equilibrium: Large Country Case
Notice that there is a unique set of prices that satisfies the equilibrium conditions for every potential
export tax that is set. If the tax was set higher than T, the price wedge would rise, causing a further
increase in the Mexican price, a further decrease in the U.S. price, and a further reduction in the quantity
traded.
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