Question

. Draw a diagram showing the demand and supply for aluminum in the United States. Assume the United States can import as much as it wants at the world price of aluminum without causing the price to increase; and assume that the world price is lower than the U.S. equilibrium price. Be sure to indicate on your graph the quantity of aluminum imported. (Feel free to use hypothetical numbers.) Be sure to briefly describe your diagram in words.

2. Now show on your graph the effect of the U.S. imposing a tariff on aluminum. Be sure to indicate the new U.S. price, and the new quantity imported. (Again, feel free to use hypothetical numbers). Be sure to briefly describe your diagram in words.

3. Why would a tariff on aluminum be a “win” for American aluminum producers? Will anyone “lose” as a result of the tariff? Briefly explain using concepts from class.

Answer 1

1) The supply of Aluminium in the United States is mentioned in figure 1 along with the demand for Aluminium. The supply and demand intersects at a price of $6. This is the autarky price or the price where there is no external trade.

Suppose that the economy opens up to trade. The price of Aluminium in the world market is $3. Now, quantity of Aluminium supplied at a price of $3 = 100 and the quantity of Aluminium demanded at a price of $3 = 700. Therefore, quantity of Aluminium imported at this price = 700-100 = 600

2) Now assume a tariff of $2 is imposed per unit of Aluminium. This raises the price of Aluminium from $3 to $5. Now, quantity of Aluminium supplied at a price of $5= 300 and the quantity of Aluminium demanded at a price of $5 = 500. Therefore, quantity of Aluminium imported at this price = 500-300 = 200.

3) It would be a win for the Aluminium producers because they are now able to sell a higher quantity of Aluminium (300 units) at a higher price ($5). So, this leads to an increase in the producer surplus which is marked as area B in figure 1.

Yes, there is a loss in consumer surplus by the amount of B+M+A+N as they now have to pay a higher price. Out of B+M+A+N, area B goes to the producers. Area A is collected by the government as import tariff revenue. The remaining area M+N is the deadweight loss due to the tariff. So both the consumers and society as a whole faces a loss.

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