Suppose Mexico imposes a tariff on imports. Import Prices increase from Pw to Pt= Pw+t Using...

Suppose Mexico imposes a tariff on imports. Import Prices increase from Pw to Pt= Pw+t Using a graph explain the following
A)What are the effects of imposing a tariff on Consumer Surplus?
B)What is the effect of imposing a tariff on Producer Surplus?
C)What is the effect of imposing a tariff on Government Revenues?
D)What is the overall effect of the tariff?
E)Do you think imposing high tariffs is a good idea? Why?

Solutions

Expert Solution

The initial price is given by Pw where imports are Dw - Sw. After tariff the price is Pt where imports are Dt - St

Consumer Surplus is the area above the price line and below the demand curve.

Initial price line is Pw and thus CS is given by area ABC

After tariff the price line is Pt and the CS is AED

Thus there is a loss of consumer surplus given by area EBCD

Producer surplus is the area above the supply curve and below the price line

Intial PS is given by OFB

After tariff the price line is Pt and the PS = OGE

Thus the producer surplus increases by BEGF

Government revenue increases by imports* tariff

Imports = Dt-St

Tariff = Pt -Pw

Revenue = GHID

Thus change in CS = EBCD

Change in PS = BEGF

Increase in government revenue = GHID

Net loss = GHID - BEGF - GHID = FGH + DIC

Thus imposition of tariff reduced the welfare of the country and generated a deadweight loss. Hence imposing high tariff is not a good idea.

Rahul Sunny answered 1 year ago

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