Question

3. Welfare effects of a tariff in a small country

Suppose Guatemala is open to free trade in the world market for oranges. Because of Guatemala’s small size, the demand for and supply of oranges in Guatemala do not affect the world price. The following graph shows the domestic oranges market in Guatemala. The world price of oranges is PW = $800 per ton.

On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS).

If Guatemala allows international trade in the market for oranges, it will import ____?____tons of oranges.

Now suppose the Guatemalan government decides to impose a tariff of $200 on each imported ton of oranges. After the tariff, the price Guatemalan consumers pay for a ton of oranges is ____?____, and Guatemala will import ____?____ tons of oranges.

Show the effects of the $200 tariff on the following graph.

Use the black line (plus symbol) to indicate the world price plus the tariff. Then, use the green points (triangle symbols) to show the consumer surplus with the tariff and the purple triangle (diamond symbols) to show the producer surplus with the tariff. Lastly, use the orange quadrilateral (square symbols) to shade the area representing government revenue received from the tariff and the tan points (rectangle symbols) to shade the areas representing deadweight loss (DWL) caused by the tariff.

Complete the following table to summarize your results from the previous two graphs.

Based on your analysis, as a result of the tariff, Guatemala’s consumer surplus (INCREASES/DECREASES) by ____?____, producer surplus (INCREASES/DECREASES) by ____?____, and the government collects ____?____ in revenue. Therefore, the net welfare effect is a (GAIN/LOSS) of ____?____

Answer 1