Show graphically the changes in Producer Surplus, Consumer Surplus, Deadweight Loss and Government Tax Revenue when...

Show graphically the changes in Producer Surplus, Consumer Surplus, Deadweight Loss and Government Tax Revenue when the government institutes a Tariff on imports? If the economy is a large economy show graphically an optimal tariff.

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Expert Solution

A tariff refers to a specific type of tax that the government imposes on products or services entering or leaving the nation. In theory, when governing body places imposes a tariff program, the additional costs saddled upon the affected items reduces imports, and causes an impact on the balance of trade

In the enclosed graph, prior to the imposition of tariff all the area under the demand curve and above the dotted line indicating the world-price was consumer surplus and all below this line however above the blue supply curve was producer surplus. When government institutes tariff on imports it create few societal loss that was previously consumer surplus (the shaded areas in red), causing a shift of few value from consumers to producers (the shaded area in yellow between world price and tariff), and shift few value from consumers to the government (the shaded area in blue).

Rahul Sunny answered 1 year ago

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