Question

3. Suppose Taiwan is importing electronic products from the world. Initially Taiwan adopts a free trade policy in this industry. Then it imposes a tarif on imported electronic products. Using supply and demand curves, show how the Taiwanese consumer surplus, Taiwanese prod ucer surplus, Taiwanese tariff revenue and Taiwanese total surplus will change as α result of the tarif

Answer 1

In the diagram below, we have roughly shown the downward sloping demand curve and upward rising supply curve for electronic goods in Taiwan. Suppose, Taiwan initially trades at world price of $P_w. In this case, Taiwan imports Q₁Q₄ units of electronic goods. Here, consumer's surplus is denoted by area (a+b+c+d+e+f+g) and producer's surplus is denoted by area g.

Price Supply World price+tariff $Pt World price $Pw 9 Demand Q1 2 Q3 Q4 Quantity

Now, when Taiwan imposes tariff on imported goods, price of electronic goods becomes world price + tariff i.e., $P_t. Also, import quantity falls from Q₁Q₄ to Q₂Q₃. As a result, consumer's surplus decreases to area (a+b) and producer's increases to area (c+g). Taiwanese government receives area e as tariff revenue. However, there is a net loss in welfare (area d and area f) of the economy , which is equal to the dead weight loss.

Change in total surplus = change in consumer's surplus + change in producer's surplus = {(a+b+c+d+e+f)-(a+b)} + {(g)-(g+c)} = area (d+e+f) = area (d+f) + area e = dead weight loss + government revenue