Question

A. Draw the market for building materials in the U.S. Label the domestic supply curve, the domestic demand curve, and the world price for building materials. Label the quantity of building materials consumed in the U.S., the quantity of building materials supplied in the U.S., and the amount of imports.

B. As part of the U.S.-China trade war, the U.S. government imposed a tariff on imported building materials. Using your graph from part A, illustrate the tariff. What happens to the quantity of building materials consumed in the U.S., the quantity of building materials supplied in the U.S., and the amount of imports?

C. Who bears the burden of the tariff (tax burden)? Explain.

D. Who benefits and who loses from this tariff? What happens to social surplus?

Answer 1

Hi,

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Question:

a). Answer:

We know imposing tariff increase price for that particular product in the domestic market. Imposing tariff increase government's revenue but its decrease consumer surplus. But at the same time its increase producer surplus and its negatively affect social welfare. In this graph Pwp is world price, PT is price after imposing tariff. Here i have shown the consumer surplus area by pink color, producer surplus area by yellow color, tax revenue by black color and social loss by white color.

Here total import for building materials in the US = Q4-Q1

Total US demand (CONSUME) for building materials in the US = Q4

Total domestic supply for building materials in the US = Q4 - (Q4-Q1)

b). Answer:

When the U.S.-China trade war, the U.S. government imposed a tariff on imported building materials then price of mported building materials increase from Pwp to PT. At this price level quantity demand is Q3 and quantity supply is Q2.

Here total import for the building materials in the US = Q3-Q2

Total US demand (CONSUME) for the building materials in the US = Q3

Total domestic supply for the building materials in the US = Q3 - (Q3-Q2)

Here domestic supply increase and imported quantity for the building materials in the US decrease.

Graph:

c). Answer:

The consumer  bears the burden of the tariff (tax burden). Increasing tariff increase price level and now the consumers pay more for  the building materials in the US that decrease consumer surplus.

d). Answer:

The consumer  bears the burden of the tariff (tax burden). Increasing tariff increase price level and now the consumers pay more for  the building materials in the US that decrease consumer surplus. Here the government's tax revenue has shown in black color and social loss has shown in white color. You can see both the things in the above mentioned graph. It increase producer surplus but decrease social surplus. This means that a tariff implemented by a large importing country may raise social surplus (national welfare). Whenever a large country implements a small tariff, it will raise social surplus.If the tariff is set too high, social surplus will fall. There will be a positive optimal tariff that will maximize social surplus.

Thank You