Question

4. Consider a large country importing a good from the world market. The government of this country decides to impose import tariff equal to t. In response to this tariff, foreign exporting firms decide to pay some of the tariff burden and transfer only some of the tariff to the consumers in the importing country. The two graphs below show the effect of the import tariff in the home market and in the world market. Let Pw is the initial world price. In your answer use the letters as labeled on each graph. (20 points) (a) Home Market (b) World Market Price Price x+t AXNo-trade equilibrium c* S, S D D, Quantity Imports a. What is the new world price after tariff? b. What is the new domestic price after tariff? Which area(s) represent the change in consumers' surplus at Home? c. d. Which area(s) represent the change in producers' surplus at Home? Which area(s) represent the effect of the tariff on government revenue? e. f. What is the net effect of the tariff in the home country? What is the effect of the tariff on foreign exporters? g. h. What is the dead weight loss to the world? i. Does this country gain from the tariff? Explain why? Does the world gain from this country's tariff? Explain why? j.

Answer 1

a) p^*

b) p^*+t

c) Area (a+b+c+d)

d) Area a

e)Area (c+e)

f) Net change in welfare= Area (e-(b+d))

g) Area (e+f) is lost

h) Area (b+d)

i)It gains if (e-(b+d)) is positive. This happens because the loss to consumer is more than compensated by the gain in tariff revenue pocketed by the government and the gain to the producers in domestic economy.

j)No. Any sort of distortion causes loss to the world overall.