Question

Consider a country’s domestic market with demand and supply functions: Supply function: ? = 40? − 40 Demand function: ? = 200 − 20?

As the country joins the international trade, the world price for the good is given as $2. a. Is this country exporting or importing? If so, what is the size of export or import?

Now, the government decides to impose $1 tariff to protect its industry. b. Find the size of tariff revenue. Draw a graph before/after the tariff, and clearly mark regions for deadweight loss.

c. Who (among sellers and buyers) benefits from the tariff? Why?

Answer 1

At equilibrium, demand = supply

40P - 40 = 200 - 20P

P = 4

At this price, Q = 120

a) If the world price is $2

Quantity demanded at this price is 160 while quantity supplied is 40 which means there is imports of 160 - 40 = 120

b) If government impose tariff of $1 which makes world price + tariff = $3.

Tariff revenue would be area of portion G + I whose sum is (140 - 80) * (3 - 2) = 60

Deadweight loss is the area of portion E + J whose sum is (1/2) * (80 - 40) * (3 - 2) + (1/2) * (160 - 140) * (3 - 2) = 20 + 10 = 30

c) Consumer surplus before tariff was area of portion A + B + F + H + C + E + G + I + J which reduces to A + B + F + H while producer surplus before tariff is area of portion D while it rises to D + C.

As producer surplus rises and consumer surplus falls, producer benefit and consumer loss from this tariff.