Question

5. Welfare effects of a tariff in a small country Suppose Colombia is open to free trade in the world market for soybeans. Because of Colombia's small size, the demand for and supply of soybeans in Colombia do not affect the world price. The following graph shows the domestic soybeans market in Colombia. The world price of soybeans is Pw =$400 per ton. On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer's surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producers' surplus (PS). 1200 Domestic Demand Domestic Supply 1100+ PRICE (Dollars per ton) 0 5 50 10 15 20 25 30 35 40 45 QUANTITY (Thousands of tons of soybeans)

Answer 1

World price = $400 per ton.

If Colombia allows international trade in the market for soybeans, it will import (40-10)= 30 tons of soybeans.

Consumer surplus is the triangle area above the price of $400 and below the demand curve .

CS= (0.5)(1200-400)(40)= $ (0.5)(800)(40)= $ 16000.

Producer surplus is the triangle area above the supply curve and below the price of $400.

PS = (0.5)(400-200)(10)= (0.5)(200)(10)= $ 1000.

These areas are shown in the below figure:

PRICE (Pollors per torn) Domestic supply 1700- 900 703 boot PW 500 ५०० 300 H doo 0,5 10 15 20 25 30 35 40 us so > Quantity (Thousands of tons of Soyblens) Domestre Demand

Now, suppose the government decides to impose a tariff of $200 on each imported ton of soybeans . After the tariff ,the price Colombian consumers pay for a ton of soybeans is $(400+200)= $600 per ton and Colombia will import (30-20)= 10 tons of soybeans.

Consumer surplus with tariff is the triangle area above the price of $600 and below the demand curve .CS with tariff = (0.5)(1200-600)(30)= (0.5)(600)(30)= $ 9000.

Producer surplus with tariff is the triangle area above the supply curve and below the price of $600.

PS with tariff = (0.5)(600-200)(20)= (0.5)(400)(20)= $4000

Government revenue is the rectangle area = (600-400)(30-20)= $2000

These areas are shown in the below figure :

PRICE (Pollers per ton) OOO Domestic Supply 900 800 700 have Revenue bor Put tariff ( ITU Yoo 300 V Domestio HI doo Los Demand 10 15 20 25 30 35 40 us so > I Oxcartity (Thousands of tons of Syblers DWL

	Under free trade (Dollars)	Under tariff (Dollars)
Consumer surplus	16000	9000
Producer surplus	1000	4000
Government revenue	0	2000

As a result of the tariff , Colombia's consumer surplus decreases by (16000-9000) = $7000 , producer surplus increases by (4000-1000)= $3000 and the government collects $2000 in revenue. Therefore, the net welfare effect is a decrease of (7000-3000-2000)= $ 2000 .