Question

Let's imagine the market for imported steel. Let's say in autarky our country has an equilibrium price of 250 dollars per ton(Pa = 250), and the equilibrium quantity of 500 per ton(Qa = 500)

Let's also say that the world price is currently 200 dollars per ton(Pw = 200). At this price quantity supplied would be 400 (Qs=400) and the quantity demand would be 600(Qd = 600)

a)First lets assume that home is a large country. I want you to graph both the home market for steel and the world market for steel, make sure to graph all points and label all axes. Note that the intercept for supply in home is 0 dollar (S0 = 0) and the intercept for demand curve in home is 1000 dollars(D0 = 1000)

b)Now, let's suppose home imposes some tariff(t). At this price quantity supplied at home would be 450(Qs=450) and quantity demanded at home would be 550 (Qd = 550). I need you to illustrate this tarriff's on home and the world graphs, label all points.

c)Next, I'll need you to tell me the change in home welfare due to this tariff. You will need label all the areas that have changed because of the tariff as well as telling me the change in welfare by telling me what areas have changed from each group. NOTE: I'm not expecting an explicit numerical value.

d)Finally give your answer to (b) and (c), would there a difference in effect of being a large country with tariff versus a small country with tariff? Specifically is there a difference between price consumers pay and the price international producers receive between each model? Are welfare losses(or gains) the same between each country? Is there any other special effect of being a large country and imposing a tariff?

Answer 1

a. In the above diagram we have shown the home market. Here, equilibrium is attained at the point where autarky price is Pa=$250 and quantity is Qa=500. Now, we consider the world market where equilibrium price is Pw=$200 . When world price is lower, there is more demand for imported good in the home country. Quantity demanded increases to 600 whereas quantity supplied reduces to 400.

In the world market, equilibrium price is $200 and equilibrium quantity is Qw. When price increases to $250, quantity supplied increases to Q₄ whereas, quantity demanded decreases to Q₁. This is shown in the diagram below.

b. Now, with the imposition of tariff t, the world price becomes Pw+t = Pt. As a result, in the domestic country, demand falls from 600 to 550 whereas, domestic supply increases from 400 to 450 as shown in the diagram for domestic country.

In the world market as the price decreases due to tariff to P_t, world supply decreases to Q₃ whereas, world demand increases to Q₂ as shown in the diagram for world market.

c. Due to tariff , consumer's surplus decreases equal to the area (c+d+e+f+o). Producer's surplus increases by area c. Government's revenue = area (e+f). Loss in welfare = Dead weight loss = area (d+o)

d. In being a large country without tariff, if world price is lower than domestic price, there is a higher demand for imports resulting in loss for domestic producers and gain for domestic consumers. Now, with tariff imposed , a large country will still import a large share of world imports. As a result, there is larger loss in welfare or dead weight loss. However, if a small country imposes tariff , it supports its small scale domestic producers from foreign competition. Further, dead weight loss for a smaller country is small . Hence, tariff is more beneficial for small country than for a large country.