Question

Graphically show the effect of a United States-imposed tariff on world welfare, assuming that the United States is a small country. Hoe does your result differ if the United States is a larger country?

Answer 1

In image ( a )we show the effect of tariff imposed by US considering US to be a small open economy. In the image we can see any such tariff leaves the world prices of goods unaffected. Further it raises domestic prices of goods. It can also be seen that earlier Q₁ amount of goods were produced domestically at world prices, and Q₂-Q₁ amount of goods were imported. However after tariff, due to rise in prices domestic production rises to Q₃.From the image we could seeimports are cut down and only Q₄- Q₃ quantity is imported now. Also demand earlier was Q₂, now it is onpy Q₄.So quantity demanded falls due to imposition of tariff and reduces consumer surplus.

a.

Pries la.) DD - Demand Conne SS- Supply Cune. Part ó 8, 793 by K Q Grantity Effect of Tariff on C us is a small domestic market of us country) In the figure to Putt in Production rises and consumption domestic prius domestic market from of, to falls from increases only. az a to g.

b. In the figure b we see effects of tariff when US is a large country. In such case, tariff would have effect on world prices and it raises world prices.Due to this production gets distorted and world imports fall down by significant amounts. However the exact effects of this tariff cannot be summarized in this figure alone. Usually tariff imposition by one country is followed by tariff imposition by other country and can affect trade relations with partner countries.

prices (b) World Market INSI WS Pwt TC WD- Demand for imports ws- Supples ! of imports. WD W, EN Timports