Question

 3. Welfare effects of a tariff In a small country

 Suppose Kenya is open to free trade In the world market for wheat. Because of Kenya's small size, the demand for and supply of wheat In Kenya do not affect the world price. The following graph shows the domestic wheat market In Kenya. The world price of wheat is Pw - $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).

 IF Kenya allows International trade In the market for wheat, it will Import _______  tons of wheat.

 Now suppose the Kenyan government decides to Impose a tariff of $60 on each Imported ton of wheat. After the tariff, the price Kenyan consumers pay for a ton of wheat is _______ , and Kenya will Import _______  tons of wheat.

 Show the effects of the $60 tariff on the following graph.

 Use the black line Cplus 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 taritt and the tan points (rectangle symbols) to shade the areas representing deadweight loss (DWE) caused by the tariff.

Answer 1

World price = $250 per ton.

If Kenya allows international trade in the market for wheat , it will import (160-40)= 120 tons of wheat.

Consumer surplus is the triangle area above the price of $250 and below the demand curve .

CS= (0.5)(490-250)(160)= $ (0.5)(240)(160)= $ 19200

Producer surplus is the triangle area above the supply curve and below the price of $250 .

PS = (0.5)(250-190)(40)= (0.5)(60)(40)= $ 1200

These areas are shown in below figure:

Now, suppose the government decides to impose a tariff of $60 on each imported ton of wheat . After the tariff ,the price Kenyan consumers pay for a ton of wheat is $(250+60)= $310 per ton and Kenya will import (120-80)= 40 tons of wheat.

Consumer surplus with tariff is the triangle area above the price of $310 and below the demand curve .CS with tariff = (0.5)(490-310)(120)= (0.5)(180)(120)= $ 10800

Producer surplus with tariff is the triangle area above the supply curve and below the price of $310 .

PS with tariff = (0.5)(310-190)(80)= (0.5)(120)(80)= $4800

Government revenue is the rectangle area = (310-250)(120-80)= $2400

These areas are shown in the below figure :

	Under free trade (Dollars)	Under tariff (Dollars)
CS	19200	10800
PS	1200	4800
Govt. revenue	0	2400

As a result of the tariff ,Kenya's consumer surplus decreases by (19200-10800) = $8400 , producer surplus increases by (4800-1200)= $3600 and the government collects $2400 in revenue. Therefore, the net welfare effect is a decrease of (8400-3600-2400)= $ 2400.