Tariff diagram

• In the context of the initial free trade scenario, which suppliers possess the comparative advantage?

  World suppliers
• In the initial free trade base, why is the world price (PW) low?

  World suppliers have the comparative advantage
• At the low world price (PW), what is the level of domestic supply in the free trade base?

  Q1
• At the low world price (PW), what is the level of domestic demand in the free trade base?

  Q2
• In the free trade base, what constitutes the level of imports?

  The difference between Q1 and Q2
• What measure does the government impose to reduce high levels of imports?

  A tariff
• What is a tariff?

  A tax on imports
• What effect does a tariff have on the price of imports?

  It increases the price
• Following the imposition of a tariff, what is the new price denoted as?

  PW plus T
• How is the new world supply curve (SW + T) represented on the diagram after the tariff?

  Drawn horizontally at the higher price
• On a supply and demand diagram, what does the vertical distance between two supply curves represent when a tax is imposed?

  The value of the tax per unit
• Following the imposition of the tariff, what is the increase in domestic supply from?

  Q1 to Q3
• What is the change in domestic supply from Q1 to Q3 technically known as?

  An expansion or extension of supply
• Why does domestic supply increase when a tariff is imposed?

  Higher price covers higher production costs
• What is one reason a higher price due to tariffs can attract new firms domestically into the market?

  Higher cost of production partly covered
• What is the effect of the higher price on domestic demand?

  A contraction of domestic demand
• Following the tariff, what does domestic demand contract to?

  Q4
• What is the effect of the increase in domestic supply and decrease in domestic demand after a tariff is imposed?

  Imports are squeezed
• After the tariff, what is the new level of imports?

  Q3 to Q4
• What is the intended outcome of imposing a tariff?

  To reduce imports
• What is the equation for calculating revenue?

  Price times quantity
• Before the tariff, domestic producers were producing q1 at the price of PW, what area represents the domestic producer revenue?


  Area A
• With the tariff, the price is PW plus T and they're producing Q3. What area represents domestic producer revenue?

  Area A + B + F + G
• What happens to domestic producer revenue as a result of the tariff?

  It increases
• What is the government revenue after imposing a tariff?

  Tariff per unit multiplied by imports
• The tariff per unit is the vertical distance between the two supply curves, and imports are Q3 to Q4; what area represents the government revenue?

  Area H
• Before the tariff, foreign producers were selling q1 Q2 units at the price of PW; what area represents foreign producer revenue?

  Area B + C + D
• After the tariff, foreign producers are selling Q3 Q4 units at the price of PW plus T, and area H goes to the government; what area represents foreign producer revenue?

  Area C
• What happens to foreign producer revenue as a result of the tariff?

  It falls
• What happens to consumer surplus when tariffs raise prices?

  Consumer surplus is reduced
• How is consumer surplus found on a supply and demand diagram?

  Area beneath demand curve, above price
• Before the tariff, the consumer surplus is the triangle above PW and below the demand curve, what is lost because of the tariff?

  E + F + G + H + I
• What does 'dead weight loss' mean in economics?

  Unrecovered benefits
• Which area represents dead weight loss of consumer surplus?

  Area I
• What does the dead weight loss (area I) represent?

  Units not being produced anymore
• What happens to domestic producer surplus as a result of a tariff?

  It increases
• How is producer surplus found on a supply and demand diagram?

  Area above supply curve, beneath price
• The producer surplus gained because of the tariff is the change from the small triangle below PW to the triangle below PW + T. Which area represents the total gain of producer surplus?

  E + F
• What is allocative inefficiency?

  Inefficient distribution of resources
• How is allocative inefficiency created by the tariff in the domestic market?

  Artificially increased world price attracts firms