Question

Show and explain the case where the small nation Country 1 imports Good A. Initially it has an import tariff on Good A, then it eliminates the tariff. Depict this graphically. [Be sure to label the axes and curves of your graph. Label the appropriate surplus areas with letters.]

(a) When the country changes from having a tariff to no tariff, what happens to (i) producer surplus, (ii) consumer surplus, (iii) deadweight loss, and (iv) government tariff revenue? (Describe the changes using the surplus area letters.)

(b) ● Which is larger for the domestic country (either with or without the tariff): Dom QS or Dom QD?

● Given a decrease in the price, which side of the market experiences the bigger impact: buyers or sellers?

Answer 1

Answer:-

A.

Following of the Required figure.

As above figure shows -

When tariff was imposed -

Consumer surplus = area (a+b)

Producer surplus = area (c+g)

Tariff revenue = area e

Deadweight loss = area (d+f)

When tariff was eliminated -

Consumer surplus = area (a+b+c+d+e+f)

Producer surplus = area g

Tariff revenue = 0

Deadweight loss = 0

Thus,

(i) Producer surplus decreases by area c when country eliminates tariff.

(ii) Consumer surplus increases by area (c+d+e+f) when country eliminates tariff.

(iii) Deadweight loss gets eliminated when country changes from having tariff to no tariff.

(iv) Tariff revenue of government also gets eliminated when country changes from having tariff to no tariff.

B)

Following is the Required figure.

When tariff was imposed, domestic consumers were consuming Q3 quantity of Good A. After tariff was eliminated, domestic consumers are consuming Q4 quantity of Good A.

So, domestic consumption has increased by Q3Q4 quantity with the elimination of the tariff.

When tariff was imposed, domestic producers are producing Q2 quantity of Good A.

After tariff was eliminated, domestic producers are producing Q1 quantity of Good A.

So, the domestic production has decreased by Q2Q1 quantity with the elimination of the tariff.