Question

Welfare effects of a tariff in a small country

Suppose Burundi is open to free trade in the world market for maize. Because of Burundi’s small size, the demand for and supply of maize in Burundi do not affect the world price. The following graph shows the domestic maize market in Burundi. The world price of maize is PWPW = $350 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).

CSPS020406080100120140160180200440430420410400390380370360350340PRICE (Dollars per ton)QUANTITY (Tons of maize)Domestic DemandDomestic SupplyPW

If Burundi allows international trade in the market for maize, it will importtons of maize.

Now suppose the Burundian government decides to impose a tariff of $30 on each imported ton of maize. After the tariff, the price Burundian consumers pay for a ton of maize is, and Burundi will importtons of maize.

Show the effects of the $30 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.

World Price Plus TariffCSPSGovernment RevenueDWL020406080100120140160180200440430420410400390380370360350340PRICE (Dollars per ton)QUANTITY (Tons of maize)Domestic DemandDomestic SupplyPW

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

	Under Free Trade	Under a Tariff
	(Dollars)	(Dollars)
Consumer Surplus
Producer Surplus
Government Revenue	0

Based on your analysis, as a result of the tariff, Burundi’s consumer surplus by, producer surplus by, and the government collectsin revenue. Therefore, the net welfare effect is a

Answer 1