Basic Analysis of a Tariff

Tariffs

, or customs
duties, are taxes on imported products, usually in an ad valorem form,
levied as a percentage increase on the price of the imported product.
Tariffs are one of the oldest and most pervasive forms of protection and
barrier to trade.

A tariff is defined as a tax on imported goods. The easiest way to show how it works is with an example. Below, we have continued the example from the beginning of this section: the US lumber market. In the domestic market, the domestic equilibrium price and quantity are $1,000/board feet, and 40 million board feet, respectively.

This is denoted as PD = $1,000 and QD = 40 million. In this case, the world price, or PW is substantially lower than the domestic price. While this is not always the case, there is no incentive to import if PW is greater than PD (This model assumes that imports are identical to domestic products in every respect except for price).

With access to imports with prices as low as $400, American consumers will purchase significantly more lumber. Their quantity demanded will increase to 70 million units (40 million more than the domestic equilibrium). These consumers are significantly better off with the new access to cheap lumber.

Domestic producers, on the other hand, lose a large degree of surplus from the imports. Whereas before they supplied 40 million board feet of lumber at $1000, now they can only supply 10 million board feet.

With domestic production of 10 million and total production of 70 million, 60 million board feet of lumber are imported from Canada.

screen-shot-2016-12-27-at-9-39-10-am
Figure 4.9a

With such a significant portion of lumber production being imported, the government may choose to introduce a protectionist policy to restrict foreign competition, due to severe pressure from domestic producers.

Suppose the government enacts a $400 tariff on imports to restrict competition. A tariff is a tax imposed on important goods or services. This creates an equilibrium price equal to $800 (world price the $400 tariff).

While this price is still below the domestic equilibrium, more domestic firms are now able to compete. In the new equilibrium, total quantity is 50 million board feet, 30 million of which are domestic. This means that imports have dropped from 60 million to 20 million board feet.

screen-shot-2016-12-27-at-9-39-52-am
Figure 4.9b

In this situation, domestic producers are better off, as they are now able to sell 20 million more units. Consumers, on the other hand, are worse off, as they face a higher price. The government is better off with revenue collected by the tariff. In Figure 4.10c, we have broken down the effects of the tariff on each of the market players.

screen-shot-2016-12-27-at-9-40-23-am
Figure 4.9c

Effects on Tariff Revenue Consumer Surplus and Welfare

Effects on Tariff Revenue, Consumer Surplus and Welfare

SMART also calculates the impact of the trade policy change on tariff revenue, consumer surplus, and welfare.

Tariff revenue change on a given import flow is computed simply as the final ad-valorem tariff multiplied by the final import value minus the initial ad-valorem tariff multiplied by the initial import value.

The graphics below illustrates the link between tariff revenue, consumer surplus and welfare changes. It depicts the market for a given imported good with D and S the demand and supply curves (export supply elasticity is infinite).

Impact of reducing a tariff from t0 to t1

The left hand diagram depicts the current (pre cut) situation where the considered good faces a tariff (t0) which entails a domestic price of Pw T0 (Pw is world price) and, given the structure of the demand, an imported quantity of Q0. The following variables are captured by the graphics:

  • Initial Tariff Revenue (TR0): is represented by the horizontal red stripe rectangle and is equal to Q0*T0.
  • Initial Consumer Surplus (CS0): is representedby the diagonal blue stripe triangle and is broadly defined as the difference between the consumer’s willingness to pay (marginal value) and the amount she actually pays.
  • Initial Dead-Weight Loss (DWL0): is representedby the vertical green stripe triangle and represents what the economy looses in terms of welfare by imposing tariff t0 on the imported good.

The right hand graphics depicts the impact of reducing the tariff from t0 to t1. Since the domestic price (Pw t1) is lowered compared with the initial state, import demand increases from Q0 to Q1 with consequences on the variables seen above:

  • Final Tariff Revenue (TR1): is representedby the horizontal stripe rectangle and is equal to Q1*T1. The result is not straightforward and depends on the magnitude of the import demand elasticity.
  • Final Consumer Surplus (CS1): is represented by the diagonal stripe triangle. This result is not calculated by SMART, despite the (improper) use of the term Consumer Surplus in some results provided by SMART.
  • Final Dead-Weight Loss (DWL1): is represented by the vertical green stripe triangle and represents what the economy still looses in terms of welfare because of the remaining tariff protection.
  • Welfare Change (DW): is represented by the a-b-c-d area and is what the economy as a whole gains by reducing the tariff from t0 to t1 (the reduction in dead-weight loss). This gain is made of:
  • The additional tariff revenue entailed by the increase in imports (Q1-Q0)*t1
  • The additional consumer surplus entailed by the increase in imports
    ½*(Q1-Q0)*(t0-t1).

It should be noted that tariff revenue change is made of two opposite effects:

  • A tariff revenue loss at constant import value, which corresponds to a transfer from the State to consumers and is equal to Q0*(t0-t1).
  • A tariff revenue gain through the increase in imports which enlarges the tax base and is equal to (Q1-Q0)*t1.

Using SMART internal import demand elasticity values, the tariff liberalization simulation returns a negative tariff revenue change (that is revenue gain from increased imports not enough to dominate revenue loss due to tariff decrease) in most cases.

Next: SMART Input Requirements and Output Results


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The World Bank, 2010

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There are two types of protection;
Tariffs, which are taxes, or duties, on imported
goods designed to raise the price to the level of, or above the existing
domestic price, and non-tariff barriers, which include all other
barriers, such as:

Basic
Analysis of a Tariff

Introductory Notes
and Caveats

These notes focuses mainly on mechanics, and getting
comfortable with a model that we can use to picture the effects of different
kinds of import restrictions on particular markets.  We will concentrate
on the policies of tariffs and quotas.  In this discussion, the question
you should always be able to answer is “who benefits and who suffers from
this policy?”

You may notice that when we analyze tariffs and quotas
we are applying microeconomic tools, looking only at markets in individual
goods and not at the big picture of overall trading patterns.  This
is because in order to focus in on a few questions we have to make tons
of simplifying assumptions.  One of those assumptions is the economist’s
favorite ceteris paribus (“other things being equal”), which is the convenient
assumption that we can look at changes in one market while assuming that
everything else in our economy is not changing.  (Note for example
that in Ricardian trade theory we do assume that one market affects another,
when productive factors from one industry move into another industry.) 
We also bring over a lot of other simplifying assumptions from neoclassical
micro, such as the assumption of perfect competition in domestic industry. 
So beware: these are starkly oversimplified models that are useful because
they help us think about issues.  But be careful about naively using
the results from a model as a guide to policy.

The core intuition of this theory, which is similar to
that of the broader trade theory we examined earlier, is that restrictions
on trade move the global economy farther away from an ideal international
general equilibrium in which everyone buys or sells at the same set of
prices.  In neoclassical theory, this one global set of prices would
guide efficient use of resources.

A Tariff in a Small
Country

A tariff is a fee assessed on imports.  This can
be imposed in various ways but we’ll stick with the “specific tariff,”
a simple per-unit charge. The tariff represents a per-unit charge that
has to be paid to the government by whomever brings the good across the
border and into the country.  If there is a $1,000 tariff on imported
automobiles, then no new car can be imported into the United States without
paying $1,000 to customs agents as it is brought in.

To do our analysis, we have to know whether the international
price of the good in question will be affected by changes in our demand
for it.  The easiest case is the “small country” in which the international
price will not change when our demand for the good changes, so we can treat
it as a given.  Suppose we are the nation of Monaco, and we are importing
tubas.  Let us suppose that the standard international price of a
tuba is $200.  This is a price which is not going to fall if we demand
fewer tubas, or rise if we demand more, because we represent an insignificant
part of the total global tuba market.

Look at this diagram.

What does it mean?  First, the assumption we just
made of an unchanging international price is reflected in the horizontal
foreign supply schedule.  Whether we buy one foreign made tuba or
500, foreign suppliers will always ask $200 per tuba.  (Monaco is
to the world tuba market as I am to the Seattle espresso market: if I double
my espresso intake, the price of espresso will not rise.)

Second, there are also domestic tuba producers, who show
up as a domestic supply schedule.  What this curve says is the higher
the price that domestic tuba makers can get, the larger the quantity they
will be willing to supply.  We usually base this, in micro, on the
assumption that producers face rising per-unit costs of making goods. 
As drawn, the first tuba costs $101 to make, the second $102, the third
$103, and the hundredth $200. If domestic producers made 101 tubas, the
101st tuba would cost them $201 to manufacture.  So if the price they
can get is only $200 per tuba, they will make only 100 tubas, not 101 tubas. 
(Remember that we assume prefect competition in this simple micro model,
in which individual suppliers take the price they observe in the market
as given and react accordingly.)

Finally, we have a demand schedule, the thick line which
represents the quantity of tubas that consumers in Monaco will buy at each
different price.  (Review the market model: Why do consumers buy larger
amounts of tubas at lower prices? If there were no foreign tubas permitted,
what would be the quantity of tubas produced and sold in Monaco? 
At what price?  Why?)

If there are no restrictions whatever on tuba imports,
what happens?  Well, it’s pretty clear that there will be imports,
and that the market price will be $200.  Look at the demand schedule. 
Buyers have no reason to pay more than $200, because they can always get
an imported tuba for $200.  Domestic producers have no reason to sell
for less than $200.  In these conditions domestic suppliers will make
100 tubas, domestic consumers will buy 400, and imports of 300 will make
up the difference between domestic demand and domestic supply.

Be sure you can see this before
moving on.
  Think about why domestic producers, foreign
producers, and domestic consumers behave as they do.

Now let us suppose that the Monagesque Tuba Maker’s Society
bribes enough politicians to have a $50 tariff imposed on each imported
tuba.  This means that while the international price remains $200,
the price that consumers within Monaco face for an imported tuba now rises
to $250.  What will the new domestic price be?  The new domestic
quantities demanded and supplied?  How much will imports be?

The diagram shows the effect of this tariff on the domestic
price and the quantities consumed, produced by the domestic industry, and
imported.  Who gains?  Who loses?

We can deepen the analysis of gains and losses from the
tariff by using a couple of ideas from microeconomics.  Think, first,
about the suppliers of a good — take the example of the domestic suppliers
in the example above.  Their total revenue received is quantity (150)
times price ($250) or $37,500.

What of their costs?  From the above description
of the supply curve, the first unit cost them $100, the second $101, and
so on.  Adding up these costs to make each unit gives you the area
under the supply schedule, up to Q=150, as the cost of making 150 units. 
Don’t worry about the exact cost and profit numbers in the example, but
see if you can make sense of the idea that the region underneath the supply
curve represents total (variable) costs (there’s another category called
fixed costs; don’t worry about that now).  The difference between
total revenue and these costs is “producer
surplus

What did the introduction of a tariff do to domestic producers’
surplus?

We can introduce an analogous concept of “consumer
surplus
,” though the reasoning may seem a bit less concrete. 
Start with a very simple market model like this:

In this example consumers actually paid $60,000 for 300
widgets at $200 per widget.  But how much were those widgets actually
worth to the consumers?  Look at the demand curve.  It tells
us, for example, that had the market price been $300 rather than $200,
100 people would still have bought widgets.  If the price had been
$400, 1 person would have bought one widget — there’s one person in the
economy for whom a widget is actually worth $400, then another person who
would buy a widget at $399, and so on.  So when widgets are actually
sold for only $200, the people who would have paid a higher price, if they
had been required to, actually get widgets for less.  And they are
very, very happy.   So, we can add up a triangle, as shown, of
what people would have paid but did not have to, and call that “consumers’
surplus.”

Now we can put our analysis together.  When the domestic
price rose in our Monaco example, that reduced consumers’ surplus by the
amount of the shaded area shown below.

So the first losers in our story are consumers in Monaco. 
They pay more, and we can use the shaded area as a measure of how much
worse off consumers are after this tariff.  The question follows,
as night the day: was consumers’ loss someone else’s gain? The answer is
for the most part yes.  Part of what consumers lost was gained by
government, and part by domestic producers.

What of the remaining two little triangles?  Those
are termed “deadweight loss,” meaning that they are a loss that is nobody
else’s gain.

We now have a geometrical way to talk about who gains
and who loses from a tariff.  Our answer in this case is that domestic
consumers lose, but that most of that loss is made back by the protected
firms and by government — another way to put it is that there is a transfer
from consumers to government and protected firms.

A Tariff in a Large
Country

In the case of a large country which consumes a significant
part of global production of a good, it is reasonable to assume that the
foreign supply schedule slopes up, rather than being a horizontal line.

For ease in exposition, we’re going to assume that this
is a good that is not domestically produced in the country in question,
so we don’t have to deal with a domestic supply curve.  Let’s suppose
we are looking at U.S. demand for coffee.


Without restrictions, we end up at a market equilibrium
of $4 a pound and 200 million pounds sold.

Now let us suppose that the U.S. government imposed a
$2 tariff on every pound of coffee.  The result would be that U.S.
consumers would end up paying $2 more per pound than foreign producers
received.  The market would end up an equilibrium like this, with
a quantity demanded and supplied at which the price paid by consumers was
exactly $2 higher than the price received by the foreign suppliers.


Now we can use our analytical apparatus, developed above,
to examine the winners and losers.  As in the earlier example, there
has been a loss in consumers’ surplus, as shown in the green area below:
coffee is more expensive than before, some people can no longer afford
it, and those who still can are paying more than they used to.  So
once again consumers, clearly, are losers.

Government, however, has gained quite a lot in the form
of tariff revenue — $300 million, in this case (the cross-hatched area). 
The government’s $300 million gain more than offsets the $175 million of
lost consumer surplus.

Foreign producers, finally, lose.  the tariff forces
them down their supply curve, and they end up exporting less coffee and
selling it for a lower price.  So they suffer a loss in producer surplus
of $175 million.

The total losses exceed the gains, but the loss in producers’
surplus is suffered by foreigners and — ha ha! — we don’t care about
them.
  From a purely national point of view (in this example),
this tariff has produced a net gain.  You can see from this why reductions
in tariffs often have to be negotiated reciprocally between countries.


©1998 Colin Danby.

Conclusion

In chapter 4, we looked at a number of policies that resulted in gains for some market players, but overall deadweight loss for society. We explored price and quantity controls, taxes and subsidies, and trade policy.

In all cases except for subsidies, the policies reduced equilibrium quantity to a point where MB {amp}gt; MC. This means that although the net marginal benefits from an additional unit were greater than the net marginal costs, the policy was restricting the market from returning to equilibrium

Why would the government implement policies that decrease market surplus? One possible reason we addressed is politics. In our example of trade policy, the domestic producers of lumber pressured the government to increase protection against foreign competition.

This protectionist stance is quite common. Though trade is beneficial for society overall, many workers can lose jobs in the short run to foreign competition. In addition, when the people who stand to gain from a policy are concentrated and vocal, the majority is often ignored.

One of the most common reasons for policy, which we will discuss in detail in Topic 5, is that the market does not take into account all the costs it imposes on society. This does not mean the model is flawed, we just need to add another layer: externalities.

Glossary

Domestic Equilibrium
The equilibrium acheived by a market if it is not open to trade
Tariff
a tax imposed on imported goods or services
World Price
the equilibrium price of the world market

Exercises 4.9

Use the diagram below, illustrates the domestic supply curve (SD) and demand curve for a good, to answer the following THREE questions. Assume that the world price is equal to $20 per unit, and initially there are no trade restrictions in place.

Basic Analysis of a Tariff

1. If a tariff of $10 per unit is introduced in the market, then, at the new equilibrium:

a) Consumers will pay a price of $20, quantity sold will be 60 units, of which 40 are imported.
b) Consumers will pay a price of $30, quantity sold will be 40 units, of which 30 are produced domestically.
c) Consumers will pay a price of $20, quantity sold will be 60 units, of which none are produced domestically.
d) Consumers will pay a price of $30, quantity sold will be 40 units, of which none are imported.

2. If a tariff of $10 per unit is introduced in the market, then the government will raise ____ in tariff revenue.

a) $400.
b) $300.
c) $200.
d) $100.

3. If a tariff of $10 per unit is introduced in the market, then the deadweight loss will equal:

a) $50.
b) $100.
c) $150.
d) None of the above.

The following two questions refer to the diagram below, which illustrates the domestic supply curve (SD) and demand curve for a good. Assume that the world price is equal to $5 per unit, and that initially there are no trade restrictions.

Basic Analysis of a Tariff

4. If a tariff of $10 per unit of imports is introduced, which area represents the deadweight loss?

a) a f.
b) c e.
c) a b c e f g.
d) a b d h g f.

5. If a tariff of $10 per unit of imports is introduced, which area represents the tariff revenue raised?

a) d.
b) d h.
c) h.
d) b h g.

Use the diagram below – which illustrates the domestic supply and demand curves for a good – to answer the following TWO questions. Assume that the world price is equal to $2.

Basic Analysis of a Tariff

6. If there are no trade restrictions in place, what will be the equilibrium quantity of IMPORTS?

a) 40.
b) 50.
c) 60.
d) None of the above.

7. If a tariff of $2 is introduced, then:

a) Imports will decrease and social surplus will increase.
b) Imports will decrease and consumer surplus will increase
c) Imports will decrease and domestic producer surplus will increase.
d) All of the above will occur.

8. The diagram below illustrates the domestic supply curve (SD) and demand curve for a good. Assume that the world price is equal to $5 per unit.

Basic Analysis of a Tariff

If imports of this good are banned altogether, which area represents the deadweight loss?

a) a b.
b) e.
c) c d.
d) a b c d e.

9. The diagram below illustrates the domestic supply curve (SD) and demand curve for a good. Assume that the world price is equal to $10 per unit, and initially there are no trade restrictions.

Basic Analysis of a Tariff

If a tariff of $10 per unit is introduced, by how much to imports decrease?

a) 10 units.
b) 20 units.
c) 30 units.
d) 40 units.

Consumers

Consumers originally purchased 70 million board feet at $400 each, and now purchase 50 million at $800 each.

The change in surplus is represented by a decrease in areasA B C D

Distortion

There is a potential distortion of the
principle of comparative advantage, whereby a tariff alters the cost
advantage that countries may have built up through specialisation.

Effect of tariffs

  • Without any trade, the equilibrium price is £1.80 and a quantity of 40 million
  • With a tariff of £0.40, the price of imports will be £1.60.
  • The quantity of imports at £1.60 is (50-30) = 20 million.
  • WIth free trade (no tariffs) the price would be £1.20 and quantity bought 60 million.

Government tariff revenue

  • Tariff revenue = tariff × q. of imports (£0.40 × 20 million) = £ 8 million

Consumer surplus

This is the difference between the price consumers pay and the price they are willing to pay; therefore we find the area of the triangle between demand curve and price

  • With no trade = (£3.20 – £1.80 × 40) /2 = (£1.40 ×40)/2 = £28 million
  • After tariff – (£3.20 – £1.60) × 50)/2 = £40 million
  • With no tariff (free trade)- £3.20 – £1.20 × 60)/2 = £60 million
  • Tariffs reduce consumer surplus by £20 million

Diagram showing effect of tariffs on consumer surplus<img class="aligncenter wp-image-135615 size-large" src="data:image/svg xml,» alt=»effect-tariffs-on-consumer-surplus» width=»600″ height=»431″ data-lazy-srcset=»https://www.economicshelp.

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org/wp-content/uploads/2017/11/effect-tariffs-on-consumer-surplus-300×216.png 300w, https://www.economicshelp.org/wp-content/uploads/2017/11/effect-tariffs-on-consumer-surplus-768×552.png 768w, https://www.economicshelp.

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Producer surplus

The difference between the price and the price firms are willing to supply at (supply curve

  • With no trade (£1.80 – £0.5) × 40)/2 = £24 million
  • With tariff (£1.10 × 30)/2 = £15 million 16.5
  • With free trade and no tariff (£0.7 ×20)/2 = £6 million.
  • Tariffs increase producer surplus by £9 million

Welfare effect of tariffs = gain in producer surplus (£9 m) gain in tariff revenue (£8m) – loss of consumer surplus £20m)

  • Therefore net welfare loss = £3 million

The US has tariffs on many imports, such as:

See also:

Glossary

Domestic Equilibrium
The equilibrium acheived by a market if it is not open to trade
Tariff
a tax imposed on imported goods or services
World Price
the equilibrium price of the world market

Government

The government charges a $400 tariff on the 20 million remaining imported board feet.

The change in surplus is represented by an increase in area C

Higher prices

Domestic consumers face higher prices, which
also means that there is a loss of
consumer surplus.
However, there is a gain in domestic producer surplus as producers are
protected from cheap imports, and receive a higher price than they would
have without the tariff. However, it is likely that there is an overall
net welfare loss.

Without trade, the domestic price and quantity are P {amp}amp; Q.

If a country opens up to world supply, price falls to P1, and output
increases from Q to Q2. As a result, domestic producers’ share falls to
Q1 and imports now dominate, with the quantity imported Q1 to Q2.

The imposition of a tariff shifts up the world supply curve to
World Supply Tariff.

The price rises to P2, and the new output is at Q3. Domestic
producers share of the market rise to Q4, and imports fall to Q4 to Q3.
The result is that domestic producers have been protected from cheaper
imports from the rest of the World.

Given that domestic consumers face higher prices, they also suffer
a loss of consumer surplus. In contrast, domestic producers increase
their producer surplus as they receive a higher price than they would
have without the tariff.

Imposing a quota

In an attempt to protect domestic producers, a
quota of Q2 toQ3 may be imposed on
imports.

This enables the
domestic share of output to rise to 0 to Q2,
plus Q3 to Q4.

The quota creates a relative shortage and
drives the price up to P2, with total output falling to Q4. The amount imported falls
to the quota level. It is this price rise that provides an incentive for
less efficient domestic firms to increase their output.

One of the key differences between a tariff and a quota is that the
welfare loss associated with a quota may be greater because there is no
tax revenue earned by a government. Because of this, quotas are less
frequently used than tariffs.

Go to: Extension task

The imposition of tariffs leads to the
following:

Learning Objectives

By the end of this section, you will be able to:

  • Describe how the market changes when it is open to the world market
  • Explain the impact of tariffs to domestic consumers, producers, and government
  • Understand and show why a tariff causes a deadweight loss

Net Result

The government and producers gained areas A and C as a result of the tariff, but consumers lost areas A, B, C, and D. Overall, the policy created a deadweight loss equal to area B and D.

Producers (Domestic)

Domestic producers now sell 20 million more units for $400 more than previously (note that the tariff only applies to imports, not domestic production).

The change in surplus is represented by an increase in area A

Quotas

A is a limit
to the quantity coming into a country.

With no trade, equilibrium
market price in the country will exist at the price which equates domestic demand and domestic supply, at P, and with output at Q. However,
the world price is likely to be lower, at P1, than the price in a
country that does not trade.

The new
equilibrium price is P1 and output is Q1. The domestic
share of output is now Q2,compared with Q, the self-sufficient quantity.
The amount imported is the distance Q2to Q1.

Reasons for removing tariffs

  1. Raise revenue. If a country produces no oil, levying a tax on oil imports will raise money as people have no alternative put to pay the import tariff.
  2. Environmental. A tariff could be placed on goods who may have negative externalities. e.g.
  3. Protectionism. The most common reason for a tariff. Imposing import tariffs makes domestic firms more competitive.
  1. Trade liberalisation involves removing barriers to trade such as tariffs on imports.
  2. Free Trade areas will have no tariffs between member states, though they may have a common external tariff if it is a customs union.
  3. Lower prices for consumers
  4. Increase specialisation and benefits from economies of scale.
  5. Theory of comparative advantage states net welfare gain from free trade.
  6. The reduction of tariffs leads to trade creation.

Retaliation

There is the likelihood of retaliation from
exporting countries, which could trigger a costly trade war.

However, in the short run tariffs may protect jobs,
infant and declining industries, and strategic goods. Tariffs may also
help conserve a non-renewable scarce resource. Selective tariffs may
also help reduce a trade deficit, and reduce consumption.

See ‘new’ protectionism

The Wooden Wall to Exports

Canadian lumber is one of the most well-known Canadian exports next to maple syrup and bacon. This means relations with Canada’s biggest trading partner, the United States, can substantially help or harm the industry.

An expired deal in 2015, with a one-year grace period, means that renegotiations will impact lumber sales for years to come. The problem – the U.S. may increase its tariff (a common trade policy) from 15% to up to 25%, in response to what they say are unfair subsidies from the Canadian government.

How would this increase affect consumers? How would it affect American and Canadian producers? We will explore the incidence of trade policy, specifically tariffs, in this section.

Read more about the Canada-US lumber deals.

Welfare loss

However, the reduction in consumer surplus is
greater than the increase in
producer surplus. Even when adding the tariff revenue (area
K,L,M,N)
there is still a net loss. The net welfare loss is represented by
the triangles X and Y.

Exercises 4.9

Use the diagram below, illustrates the domestic supply curve (SD) and demand curve for a good, to answer the following THREE questions. Assume that the world price is equal to $20 per unit, and initially there are no trade restrictions in place.

1. If a tariff of $10 per unit is introduced in the market, then, at the new equilibrium:

a) Consumers will pay a price of $20, quantity sold will be 60 units, of which 40 are imported.
b) Consumers will pay a price of $30, quantity sold will be 40 units, of which 30 are produced domestically.

c) Consumers will pay a price of $20, quantity sold will be 60 units, of which none are produced domestically.
d) Consumers will pay a price of $30, quantity sold will be 40 units, of which none are imported.

2. If a tariff of $10 per unit is introduced in the market, then the government will raise ____ in tariff revenue.

a) $400.
b) $300.
c) $200.
d) $100.

3. If a tariff of $10 per unit is introduced in the market, then the deadweight loss will equal:

a) $50.
b) $100.
c) $150.
d) None of the above.

The following two questions refer to the diagram below, which illustrates the domestic supply curve (SD) and demand curve for a good. Assume that the world price is equal to $5 per unit, and that initially there are no trade restrictions.

4. If a tariff of $10 per unit of imports is introduced, which area represents the deadweight loss?

a) a f.
b) c e.
c) a b c e f g.
d) a b d h g f.

5. If a tariff of $10 per unit of imports is introduced, which area represents the tariff revenue raised?

a) d.
b) d h.
c) h.
d) b h g.

Use the diagram below – which illustrates the domestic supply and demand curves for a good – to answer the following TWO questions. Assume that the world price is equal to $2.

6. If there are no trade restrictions in place, what will be the equilibrium quantity of IMPORTS?

a) 40.
b) 50.
c) 60.
d) None of the above.

7. If a tariff of $2 is introduced, then:

a) Imports will decrease and social surplus will increase.
b) Imports will decrease and consumer surplus will increase
c) Imports will decrease and domestic producer surplus will increase.
d) All of the above will occur.

8. The diagram below illustrates the domestic supply curve (SD) and demand curve for a good. Assume that the world price is equal to $5 per unit.

If imports of this good are banned altogether, which area represents the deadweight loss?

a) a b.
b) e.
c) c d.
d) a b c d e.

9. The diagram below illustrates the domestic supply curve (SD) and demand curve for a good. Assume that the world price is equal to $10 per unit, and initially there are no trade restrictions.

If a tariff of $10 per unit is introduced, by how much to imports decrease?

a) 10 units.
b) 20 units.
c) 30 units.
d) 40 units.

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