Question

This question specifically looks at "Change in Quantity Supplied". This is the scenario: in 2020 French wine prices in the United States will increase due to TARIFFs placed on it. It is predicted that less French wine will sell in the USA due to these tariffs increasing the price. How will this affect Change in Quantity Supplied?

This question is based on a currnet event: The Trump Administration increased tariffs on French wine. The forecast in 2020 by the French is that there will be less Americans buying French wine due to the increase in price because of tariffs. how does this affect "Change in Quanity Supplied" with French wine being exported to the USA? Usually an increase in price increases supply due to increased profitability. But, these are tariffs increasing the sell price which doesn't mean the supplier recieves more profit. So will supply decrease? what will the movement be on the curve?

Answer 1

Tariffs are effectively tax or duty applied on an item which is being imported. They result in increase in price paid by the final consumer but no increase in revenue or profits for the supplier. Let us discuss the impact of tariffs with the help of the graph below.

Lets us assume that initial price of French wine per bottle is at equilibrium and is P_e. The quantity supplied and demanded at this point is Q_e. Now a tariff is imposed, which increases the price to P`. This results in the demand dropping to Q`, as shown in the figure. Also note that not whole tariff is being paid by the consumers. Some part of it is being paid by the producers too (the part below P_e). This shows that despite an effective increase in price of the wine, the supply actually dropped since the tariff resulted in increase in price for both the producer and the consumer. The movement was to the left on the demand and supply curve.

P.S.- We can also see the deadweight loss (the loss in total surplus) due to the tax. It is the shaded area.