Question

While answering the questions below, assume France is a small country and thus unable to influence the world price. Its demand and supply schedules for washing machines are shown in Table below.

Price of a washing machine ($)	Quantity Demanded	Quantity Supplied
500	0	50
400	10	40
300	20	30
200	30	20
100	40	10
0	50	0

1. Draw the graphs of demand and supply and determine the equilibrium price and quantity.
2. Suppose France imports washing machines at a world price of $100 each. How many washing machines will be produced, consumed, and imported?
3. To protect its producers from foreign competition, suppose the French government levies a specific tariff of $100 on imported washing machines.

(a) Find and show graphically the domestic price of washing machines in France, the quantity of washing machines supplied by French producers, the quantity of washing machines demanded by French consumers, and the amount of import after the tariff is imposed. Explain how the domestic price and quantities changed as compared to the no-tariff situation.

(b) Show graphically and calculate the effects of this tariff on consumers, producers, government, and on the economy as a whole.

Answer 1

Kindly refer the graph along with typed answer.

The domestic equilibrium is at $250 where demand and supply intersect and 25 units are produced.

Now, that France imports at $100, more customers demand washing machines (because it's cheaper now), while the domestic producers aren't able to producer at such low cost (because they may not have comparative advantage over it). Thus, at $100, demand is 40 units, out of which only 10 units are supplied by domestic producers, and remaining 30 units are imported.

(A) Now, the government realises that it's producers are losing out to their foreign competitors and artificially raise the import price by imposing a tariff of $100. So now, the price become $200 for imported good, but it is still below the domestic equilibrium where all domestic demand is met by domestic producers.

Anyway, at $200, demand reduces to 30 units because it's costlier now (loss in consumer surplus) and out of this, 20 units is provided by domestic producers (gain in producer surplus) and 10 units are imported. The government raises $100 on every unit imported, that amounts to a total government revenue of $100 * 10 = $1000. (highlighted in graph with green).

(B) So we see, that there is gain in producer surplus and government revenue and loss in consumer surplus with the new tariff. However, the loss is much more than the gains and this net welfare loss is known as deadweight loss which is shaded with black (the two triangle in the graph).

We can calculate the quantum of the losses by using menstruation formulas of rectangle and triangle in the graph. The consumer surplus is everything above price line and below demand curve. Similarly, producer surplus is everything below price line and supply curve.

	Before Tariff	After Tariff
Consumer Surplus	8000	4500
Producer Surplus	500	2000
Government Revenue	0	1000

Thus, total welfare before tariff was 8500, and after tariff was 7500. The loss in total welfare is called Deadweight Loss and it is equal to 1000 here.

Thanks!