Question

Using fully labeled graphs and words that clearly and fully explain these graphs show the impact

a tariff will have on U.S. consumers, U.S. producers, and the U.S. Treasury. Assume that before

the tariff is imposed that U.S. consumers can buy goods at world prices (i.e. there are no restrictions

on imports into the U.S.)

Answer 1

Effect of tariff shown in following graph.

AB and CD are domestic demand and supply curves. Pre-trade (domestic) equilibrium is at point E with price P1 and quantity Q1.

After trade opens, with free trade, world price is P* for which domestic consumption is Q2 and domestic production is Q3.

Imports = Q2 - Q3

Consumer surplus (CS) = Area between demand curve and world price = Area AFP*

Producer surplus (PS) = Area between supply curve and world price = Area CGP*

After tariff, domestic price rises to Pt, at which domestic consumption is Q4 and domestic production is Q5.

Imports = Q4 - Q5.

The tariff decreases imports.

After tariff,

New CS = Area AHPt

New PS = Area CJPt.

Decrease in CS = Area PtHFP* (this is the loss to consumers)

Increase in PS = Area PtJGP* (this is the gain to producers)

Tariff revenue = Area PtHLP* (this is the gain to U S Treasury)

Deadweight loss = Area FHL + Area GJK