Question

1. Use the figure below and consider that the US government enacts a $400 tariff on imports to restrict Canadian competition.

1. What is the price of the product in the US after the tariff?

2. What is the new total demand of the product in the US market?

3. What is the tax revenue obtained by the US government?

4. What are the total gains or losses for consumers and producers after the tariff?

The US Lumber Market $2.000 $1,800 $1,600 $1,400 $1,200 Dollars per thousand board feet $1,000 $800 $600 Imports World Price $400 $200 SO 10) 20 30 70 80 90 100 40 50 60 Millions of board feet

Answer 1

a) After the imposition of the tariff of $400, the price of the product in US will be = World Price + $400

= $400 + $400

= $800.

b) New total demand in the United States market at the price of $800 would be = 50 millions of broad feet.

c) The tax revenue obtained by the US governement =

Total units that will be imported when the price is $800 = 50-30 = 20 million

Tax revenue = Total units * Tariff per unit

= $400 * 20 million

= $ 8 billion.

d) Due to the imposition of the tariff, the consumer surplus would decrease.

The initial consumer surplus = 0.5 * 70 * (1800-400)

= $49000 million

The consumer surplus after the tariff =

= 0.5*50 * (1800-800)

= $25000 million

So, there will loss in consumer surplus of $24000 million.

After the imposition of the tariff, the producer surplus would increase and the producers would be benefitted.

Initial producer surplus = 0.5 * (400-200)*10

= $1000 million

Producer surplus after the imposition of tax =

= 0.5 * (800-200)*30

= $9000 million

So, the producer surplus has increased by $8000 million.

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