Question

The domestic demand for bicycles is given by Q = 32/0.3 – P/0.3    The foreign supply is given by P = 16 and domestic supply by Q = P/0.4 - 12/0.4

If a 3$ tarriff is added compute the price and quantity in equilibrium with free trade, and again in the presence of the tariff.

Show the dead-weight loss

Explain costs and benefits of a tariff

Answer 1

We have compared the the quantity at price of free trade 16 and with tariff price of 19. The cost of tariff is deadweight loss particularly consumer loss of consuming less with higher price. Daw cost is inefficient production in the home country. But it increase the government revenue and producer surplus so that domestic producer will benefit and provide employment and other benefit to the society. Free trade is generally beneficial that create consumer welfare and more efficient production but with some cost of driving out inefficient production in the home country. Total surplus TS equals to producer surplus PS and consumer surplus CS .