Question

Suppose the price of import good is 20 dollar before tariff, and now a small country posted a 10% tariff on this product. As the results, the production of this product of this small country increase from 1000 to 1200. And the import of this product decreased from 600 to 200 units.

a. What is the change of producer's surplus?

b. What is the change of consumer's surplus?

c. What is the total tariff revenue?

d. What is the total dead weight loss?

Answer 1

Working notes:

(1) Tariff per unit = $20 x 10$ = $2

(2) Since import = Domestic demand - Domestic supply,

(i) Import before tariff = 600 = Domestic demand - 1000

Domestic demand before tariff = 600 + 1000 = 1600

(ii) Import after tariff = 200 = Domestic demand - 1200

Domestic demand after tariff = 200 + 1200 = 1400

(a)

Change in producer surplus = (1/2) x Tariff x (Domestic production before tariff + Domestic production after tariff)

= (1/2) x $2 x (1000 + 1200)

= $1 x 2200

= $2200 (increase)

(b)

Change in consumer surplus = (1/2) x Tariff x (Domestic demand before tariff + Domestic demand after tariff)

= (1/2) x $2 x (1600 + 1400)

= $1 x 3000

= $3000

(c)

Tariff revenue = Tariff x Import after tariff

= $2 x 200

= $400

(d)

Deadweight loss = (1/2) x Tariff x (Change in domestic demand + Change in domestic production)

= (1/2) x $2 x [(1600 - 1400) + (1200 - 1000)]

= $1 x (200 + 200)

= $1 x 400

= $400