Question

3. Welfare effects of a tariff in a small country

Suppose Bolivia is open to free trade in the world market for wheat. Because of Bolivia’s small size, the demand for and supply of wheat in Bolivia do not affect the world price. The following graph shows the domestic wheat market in Bolivia. The world price of wheat is PWPW = $250 per ton.

On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS).

? Domestic Supply 460 Domestic Demand 430 CS 400 370 PS 340 310 280 PW 250 220 190 160 + 0 25 125 50 75 100 150 175 200 225 250 QUANTITY (Tons of wheat) PRICE (Dollars per ton)

If Bolivia allows international trade in the market for wheat, it will import ____ tons of wheat.

Now suppose the Bolivian government decides to impose a tariff of $30 on each imported ton of wheat. After the tariff, the price Bolivian consumers pay for a ton of wheat is ___ , and Bolivia will import ___ tons of wheat.

Show the effects of the $30 tariff on the following graph.

Use the black line (plus symbol) to indicate the world price plus the tariff. Then, use the green points (triangle symbols) to show the consumer surplus with the tariff and the purple triangle (diamond symbols) to show the producer surplus with the tariff. Lastly, use the orange quadrilateral (square symbols) to shade the area representing government revenue received from the tariff and the tan points (rectangle symbols) to shade the areas representing deadweight loss (DWL) caused by the tariff.

? Domestic Supply Domestic Demand 460 430 World Price Plus Tariff 400 370 CS 340 310 280 PS PW 250 220 Government Revenue 190 160 0 25 DWL 75 100 125 150 175 200 225 250 QUANTITY (Tons of wheat) PRICE (Dollars per ton) 50

Complete the following table to summarize your results from the previous two graphs.

	Under Free Trade	Under a Tariff
	(Dollars)	(Dollars)
Consumer Surplus
Producer Surplus
Government Revenue	0

Based on your analysis, as a result of the tariff, Bolivia’s consumer surplus ___ by ____, producer surplus ___ by ____ , and the government collects ___ in revenue. Therefore, the net welfare effect is a __ of ___.

Answer 1

Domestic Supply Domestic Demand 460 430 CS 400 370 PS 340 310 280 Py 250 220 190 160 0 25 100 50 75 125 150 175 200 225 250 QUANTITY (Tons of wheat) PRICE (Dollars per ton)

If Bolivia allows international trade in the market for wheat, it will import 175-75 =100 tons of wheat.

Now suppose the Bolivian government decides to impose a tariff of $30 on each imported ton of wheat. After the tariff, the price Bolivian consumers pay for a ton of wheat is 280 and Bolivia will import 150-100= 50 tons of wheat.

Domestic Supply Domestic Demand 460 430 World Price Plus Tariff 400 370 CS 340 310 280 PS PW 250 220 Government Revenue 190 160 0 25 DWL 75 100 125 150 175 200 225 250 QUANTITY (Tons of wheat) PRICE (Dollars per ton) 50

	Under Free Trade	Under a Tariff
	(Dollars)	(Dollars)
Consumer Surplus	0.5*175*(460-250) = 18375	0.5*150*(460-280) = 13500
Producer Surplus	0.5*75*(250-160) = 3375	0.5*100*(280-160) = 6000
Government Revenue	0	50*30 = 1500

Based on your analysis, as a result of the tariff, Bolivia’s consumer surplus decreases by 18375-13500 = 4875, producer surplus increases by 6000-3375 = 2625 and the government collects 1500 in revenue. Therefore, the net welfare effect is a loss of 750

Answer 2

Thank you sooooooooooo much