Question

Using a market graph similar to what is was presented in the course materials, draw a graph showing how a tariff on clothing produces the following results (Hint: draw the graph large enough to incorporate labels for free trade and the impact of the tariff):

• the domestic price of clothing increases
• clothing imports are reduced
• the domestic producer surplus increases
• the consumer surplus is reduced
• the total surplus is reduced

Answer 1

Before tariff: Free trade

The price is P1. Domestic quantity supplied is Q1 and quantity demanded is Q4. This implies that imports are Q4-Q1. Producer surplus is G and consumer surplus is A + B + F + D + C + E. Total surplus is A + B + C + D + E + F + G.

After tariff: Now a tariff of P2-P1 is placed

The price is P2. Domestic quantity supplied is Q2 and quantity demanded is Q3. This implies that imports are Q3-Q2. Producer surplus is G + F and consumer surplus is A + B. Total surplus is A + B + C + F + G

Result

• the domestic price of clothing increases from P1 to P2
• clothing imports are reduced from Q4-Q1 to Q3-Q2
• the domestic producer surplus increases from G to F + G
• the consumer surplus is reduced from A + B + F + D + C + E to A + B
• the total surplus is reduced from A + B + C + D + E + F + G to A + B + C + F + G