Also known as 'customs duties', they are taxes imposed on **imported **goods. **Tariffs **serve two purposes for an economy: 1. **Reduce foreign competition** and protect domestic producers (protective tariff). 2. **Earn revenue **for the government (revenue tariff). Regardless of the purposes, the effect on the economy remains the same. An **absence** of **government** **intervention** in **international** **trade**, resulting in **no** imposing **restrictions** of any kind on **imports** and **exports**. When the **government intervenes** in international trade by imposing **restrictions** to reduce free imports. Governments usually impose tariffs to **reduce competition** and **protect** their domestic workers and firms _(or so they say) _as the reasoning behind it is: 1. Countries usually trade due to **comparative advantage** (4.1). 2. If the **world prices are lower**, domestic firms are **forced** to accept the lower prices, affecting domestic workers' wages. 3. Therefore, the country is worse off with **free trade.** ## **Tariff Diagram** [73edfdd9acb0] ![](https://cdn.sanity.io/images/w7j7fz60/production/3f7c82dce81b325cde50ce7b062c3f94e48636dc-1200x1000.png) The figure above shows the effect of a Tariff on a country engaged in **free trade.** 1. **Initially**, the domestic economy has a price $P_d$ while the world price is **lower** at $P_w$ _(the domestic country has a **comparative** **disadvantage** in the following good)_. 2. Recall, when there is **free trade**, the domestic economy will **operate on the lower** world prices. 3. This causes the quantity supplied to **reduce** from $Q_e$ to $Q_1$ and quantity demanded to **increase** to $Q_2$ from $Q_e$, resulting in the **excess demand** $Q_2-Q_1$ to be **imported**. 4. By using the** tariff **of amount $t$ imposed on imports, this causes the **domestic** (current) prices **to rise** to $P_w + t$. 5. This leads to the quantity supplied to **increase** to $Q_3$ and the quantity demanded to **fall** to $Q_4$, causing the **imports to fall** to $Q_4 - Q_3$. [{"_key":"0f8efd3926f1","_type":"block","asset":null,"children":[{"_key":"aa2ba22eaf31","_type":"span","marks":[],"text":"$P_w+t$ is the "},{"_key":"bfe3e0f1bf9e","_type":"span","marks":["strong"],"text":"new"},{"_key":"2e9c48a79316","_type":"span","marks":[],"text":" "},{"_key":"2270ec6b19c6","_type":"span","marks":["strong"],"text":"domestic price after tariffs"},{"_key":"16f10838a265","_type":"span","marks":[],"text":"! The world price "},{"_key":"5b85557ed511","_type":"span","marks":["strong"],"text":"is still the"},{"_key":"915c7d5ffa78","_type":"span","marks":[],"text":" world price of $P_w$ but domestically, the prices have risen to $P_w + t$. $P_d$ would be the domestic price "},{"_key":"fcd1cdd5d597","_type":"span","marks":["strong"],"text":"if there was no free trade"},{"_key":"3665c2d8992b","_type":"span","marks":[],"text":" initially, "},{"_key":"0b8f9492e353","_type":"span","marks":["strong"],"text":"and hence no tariffs."}],"markDefs":[],"style":"normal"}] ## The Effects of a Tariff [block_16] We can classify the stakeholders into categories of **winners** _(those who mainly gain)_ and **losers **_(those who mainly lose)_ from the inclusion of the **tariff** after initially being free trade_._ ### Winners [574704c7217b] ![](https://cdn.sanity.io/images/w7j7fz60/production/e9e846b7594ce4e4795a7b83ffb75cee8cf2cecd-1200x1000.png) #### Domestic Producers [block_40] 1. Domestic producers are supplying more ($Q_3$ instead of $Q_1$) at a higher price $(P_w + t)$, earning **higher revenues**. 2. **Producer surplus increases** by the area marked as $c$, indicating the **gain** from the **new** **prices**. The **difference** between the **price** **sellers** **receive** and the **lowest** **price** that they are **willing** **and** **able** **to accept**. #### Workers [block_46] * As producers are now supplying a **larger** **quantity**, this leads to **increasing** **employment** and **providing** **protection** for the industry. #### Government [block_50] * The government earns **revenue** equal to the tariff ($t$) multiplied by the quantity of imports ($Q_3 - Q_2$), represented by area $e$. ### Losers [886944b36830] [{"_key":"66f30f3bd837","_type":"block","asset":null,"children":[{"_key":"d33904daefda","_type":"span","marks":[],"text":"Even though "},{"_key":"951bf5209dd7","_type":"span","marks":["strong"],"text":"domestic"},{"_key":"1c2bfbbb88c7","_type":"span","marks":[],"text":" "},{"_key":"c1ea202d0b1f","_type":"span","marks":["strong"],"text":"producers"},{"_key":"00fd9a32f7ce","_type":"span","marks":[],"text":" of the "},{"_key":"cf10deec953a","_type":"span","marks":["strong"],"text":"industry"},{"_key":"10ffb4234578","_type":"span","marks":[],"text":" who were "},{"_key":"e0c26b8908c1","_type":"span","marks":["strong"],"text":"protected"},{"_key":"2b44b0d5be9e","_type":"span","marks":[],"text":" are "},{"_key":"811901ec7995","_type":"span","marks":["strong"],"text":"better"},{"_key":"a444b66946fd","_type":"span","marks":[],"text":" "},{"_key":"d670398105ad","_type":"span","marks":["strong"],"text":"off"},{"_key":"f74491803d62","_type":"span","marks":[],"text":", it "},{"_key":"3928e5d967b5","_type":"span","marks":["strong"],"text":"does"},{"_key":"eba24f58afca","_type":"span","marks":[],"text":" "},{"_key":"453e14f614d8","_type":"span","marks":["strong"],"text":"not"},{"_key":"9a3fe3266ad3","_type":"span","marks":[],"text":" mean domestic producers of the"},{"_key":"6bbce104c082","_type":"span","marks":["strong"],"text":" export industry"},{"_key":"4dc39c297a6f","_type":"span","marks":[],"text":" are "},{"_key":"8f3519833ab1","_type":"span","marks":["strong"],"text":"better"},{"_key":"6e121da58e3f","_type":"span","marks":[],"text":" "},{"_key":"078c1a58b4e8","_type":"span","marks":["strong"],"text":"off"},{"_key":"77ba44afde68","_type":"span","marks":[],"text":" as well. In fact, domestic producers of the export industry "},{"_key":"4a30fe45662a","_type":"span","marks":["strong"],"text":"might"},{"_key":"21e415594e94","_type":"span","marks":[],"text":" even be "},{"_key":"3a27f3bbe87c","_type":"span","marks":["strong"],"text":"worse"},{"_key":"667745e6288f","_type":"span","marks":[],"text":" "},{"_key":"bcea4ba27b48","_type":"span","marks":["strong"],"text":"off"},{"_key":"aa1e3ede1178","_type":"span","marks":[],"text":"."}],"markDefs":[],"style":"normal"}] #### Consumers [7d4072679779] 1. Consumers lose as they pay a **higher price **for the good ($P_w +t$). 2. Hence, they can only purchase a **lower quantity** ($Q_4$ instead of $Q_2$). 3. This causes the **consumer surplus** to fall by $c + d + e + f$. The **difference** between the **highest price** consumers are **willing and able to pay** for a good or service and the **actual price** they end up paying. #### Income Distribution [47471a17479b] 1. As the tax is on goods and services, it's **regressive** since it takes up a higher proportion of income from low-income individuals and households. 2. This increases the **disparity** between incomes (3.4.9). #### Inefficiency of Production [f1d681fbd0e0] 1. The reason world price $P_w$ is **smaller than** domestic price without trade $P_d$ is because foreign producers are **more efficient**. 2. The increase in quantity supplied from $Q_1$ to $Q_3$ represents the **domestic production increase that is inefficient **as there is a **waste of scarce resources **by producing at $P_w +t$. #### Foreign Producers [00d138e283e1] As foreign producers supply **fewer goods** ($Q_4 - Q_3$ instead of $Q_2 - Q_1$) at the same price $P_w$, their **revenues decrease **to only $(Q_2-Q_1)*Pw$. ### Welfare Effects [block_54] Initially, **before** the tariff is **imposed**: 1. The **producer surplus** is the area marked by $g$ and the **consumer surplus** is the area marked by $a + b + c + d + e + f$. 2. Thereby, the initial **social surplus** was $a + b + c + d + e + f+ g$. The sum of **consumer surplus** and **producer surplus**. Maximised in the free market, when the market operates at its **equilibrium** **point**. [{"_key":"1de81c22a9c8","_type":"block","asset":null,"children":[{"_key":"c504833d3ef5","_type":"span","marks":[],"text":"Remember:"}],"markDefs":[],"style":"normal"},{"_key":"adf62e0cc9a4","_type":"block","asset":null,"children":[{"_key":"54aaebd02679","_type":"span","marks":[],"text":"the "},{"_key":"c0b9bea7d5f6","_type":"span","marks":["strong"],"text":"producer surplus"},{"_key":"f1917d2d9084","_type":"span","marks":[],"text":" is the area below the price they earn and above the supply curve "},{"_key":"27da60f30682","_type":"span","marks":["strong"],"text":"up till the quantity sold"},{"_key":"d365515ff97c","_type":"span","marks":[],"text":". "}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"6ab765a2c694","_type":"block","asset":null,"children":[{"_key":"cb33677e2b17","_type":"span","marks":[],"text":"the consumer surplus is the area above the price of the good and below the demand curve "},{"_key":"109235a1cd16","_type":"span","marks":["strong"],"text":"up till the quantity bought"},{"_key":"3d50c3b6c53e","_type":"span","marks":[],"text":"."}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"}] **After** the **tariff** was **imposed**: 1. The producer surplus **increased** by $c$ such that it is $c +g$ now. 2. The consumer surplus** fell **by $c+d+e+f$ down to only $a+b$ now. 3. Further, the **government revenue** is the area $e$. 4. Therefore, the **social surplus** is $a + b + c +e+g$. The change in social surplus is a **decrease of:** $$ a+b+c+d+e+f+g - (a+b+c+e+g) = d+f$$ This change leads to a **welfare loss** of the area $d+f$ due to the misallocation of resources where: 1. The area $d$ welfare loss occurs due to **inefficient production by domestic firms**. 2. The area $f$ welfare loss occurs due to the **decreased consumption of consumers**. [{"_key":"block_65","_type":"block","asset":null,"children":[{"_key":"ip9ZSUgFyzGIsQgTfwtnZO","_type":"span","markDefs":[],"marks":[],"text":"When analyzing welfare loss, remember that it represents the "},{"_key":"f5cb505a3cd6","_type":"span","markDefs":[],"marks":["strong"],"text":"net"},{"_key":"9806eb5b9eb2","_type":"span","markDefs":[],"marks":[],"text":" "},{"_key":"b6e294240d30","_type":"span","markDefs":[],"marks":["strong"],"text":"loss"},{"_key":"f6fa05d57159","_type":"span","markDefs":[],"marks":[],"text":" to "},{"_key":"c2ca6e9b0fda","_type":"span","markDefs":[],"marks":["strong"],"text":"society"},{"_key":"7cc389250943","_type":"span","markDefs":[],"marks":[],"text":", "},{"_key":"f61671f49d2e","_type":"span","markDefs":[],"marks":["strong"],"text":"not"},{"_key":"56195f0ad0c1","_type":"span","markDefs":[],"marks":[],"text":" just a "},{"_key":"85e30f712e2a","_type":"span","markDefs":[],"marks":["strong"],"text":"transfer"},{"_key":"d17c4cfd9520","_type":"span","markDefs":[],"marks":[],"text":" between stakeholders."}],"markDefs":[],"style":"normal"}] ## Calculating the Effects of Tariffs (HL Only) [block_66] ![](https://cdn.sanity.io/images/w7j7fz60/production/5461ac1f30071042f1f3303b8c055aef4c0688fc-1300x1000.png) The figure above showcases a **tariff diagram** with numerical values this time for calculation. #### Tariff Per Unit [9e705b4dd81f] The **tariff** can be calculated by **subtracting** world price from world price plus tariff: $$ t = P_w+t - P_w $$ [{"_key":"cfbeef966bdf","_type":"block","asset":null,"children":[{"_key":"920377dc4eab","_type":"span","marks":[],"text":"$P_w+t - P_w = 20 - 15 = 5$"}],"markDefs":[],"style":"normal"},{"_key":"2051cba68a88","_type":"block","asset":null,"children":[{"_key":"6156ea65cc37","_type":"span","marks":[],"text":"Hence the tariff or $t=\\$ 5$."}],"markDefs":[],"style":"normal"}] #### Imports Quantity [b7771c543402] **Before** the **tariff**, the imports can be calculated by finding the** excess demand** at world price $P_w$. [{"_key":"16f0c6ea32b3","_type":"block","asset":null,"children":[{"_key":"2fce2b47199a","_type":"span","marks":[],"text":"At $P_w = \\$ 15$ we have imports $200000 - 50000 = 150000$"}],"markDefs":[],"style":"normal"},{"_key":"7655ebeba93a","_type":"block","asset":null,"children":[{"_key":"15a9c71c7eda","_type":"span","marks":[],"text":"Hence, there were $150,000$ units of the good imported."}],"markDefs":[],"style":"normal"}] **After** the **tariff**, the imports can be calculated by **similarly **finding the **new** **excess demand or imports **but at world price plus tariff $P_w+t$. [{"_key":"e4f91a8e1c61","_type":"block","asset":null,"children":[{"_key":"824091551887","_type":"span","marks":[],"text":"At $P_w+ t =20$ we have imports $150000 - 75000 = 75000$"}],"markDefs":[],"style":"normal"},{"_key":"3c28288e9384","_type":"block","asset":null,"children":[{"_key":"be089a636131","_type":"span","marks":[],"text":"Therefore, now $75,000$ units of good are imported."}],"markDefs":[],"style":"normal"},{"_key":"e9beccaf6c53","_type":"block","asset":null,"children":[{"_key":"6d6d3a9fe955","_type":"span","marks":[],"text":"Hence, the "},{"_key":"aa69d8ed643e","_type":"span","marks":["strong"],"text":"imports decreased"},{"_key":"953857eced9c","_type":"span","marks":[],"text":" by $75,000$ units after the tariff of $\\$ 5$ on the good. "}],"markDefs":[],"style":"normal"}] #### Import Expenditure [66f25d968e32] To find the import expenditure: * We can **multiply** the import quantity before the tariff by world price. * Then, we can **multiply** the import quantity after the tariff by world price. **We don't use** $P_w + t$ because the **tariff** is what **government** **collects**. You can find the **expenditure on imports** before & after the tariff respectively. [{"_key":"5dd06d5bf5bf","_type":"block","asset":null,"children":[{"_key":"dd3f5cab55bd","_type":"span","marks":["strong"],"text":"Before the tariff:"}],"markDefs":[],"style":"normal"},{"_key":"f15cb693d4b9","_type":"block","asset":null,"children":[{"_key":"da66da2024c5","_type":"span","marks":[],"text":"$150,000 \\times 15 = \\$ 2.25$ million"}],"markDefs":[],"style":"normal"},{"_key":"800950ebaadb","_type":"block","asset":null,"children":[{"_key":"775895537424","_type":"span","marks":["strong"],"text":"After the tariff:"}],"markDefs":[],"style":"normal"},{"_key":"39412c92eedc","_type":"block","asset":null,"children":[{"_key":"38fcbe0ed519","_type":"span","marks":[],"text":"$75,000 \\times 15 = \\$ 1.125$ million "}],"markDefs":[],"style":"normal"},{"_key":"a3a432a7b919","_type":"block","asset":null,"children":[{"_key":"713bdd7d3baf","_type":"span","marks":[],"text":"Hence import expenditure "},{"_key":"67e1f0b81a0d","_type":"span","marks":["strong"],"text":"fell "},{"_key":"c4137af4acc2","_type":"span","marks":[],"text":"by: "}],"markDefs":[],"style":"normal"},{"_key":"3d48464e6bc3","_type":"block","asset":null,"children":[{"_key":"6f376941761c","_type":"span","marks":[],"text":"$ \\$2.25 - \\$ 1.125 = \\$ 1.125$ (million)"}],"markDefs":[],"style":"normal"}] #### Consumer Expenditure [fd39675a71fc] For consumer expenditure: * **Before tariff**, we multiply the **world price** by initial quantity demanded. * **After tariff, **we multiply **world price plus tariff** with new quantity demanded. [{"_key":"fa2fdab70cc6","_type":"block","asset":null,"children":[{"_key":"2128a047b48c","_type":"span","marks":["strong"],"text":"Before:"}],"markDefs":[],"style":"normal"},{"_key":"93c8747834d9","_type":"block","asset":null,"children":[{"_key":"c1c5d6c4045f","_type":"span","marks":[],"text":"Consumer expenditure is $200,000 \\times 15 = \\$ 3$ million"}],"markDefs":[],"style":"normal"},{"_key":"6ff2fb5e9a0e","_type":"block","asset":null,"children":[{"_key":"26564b2fff21","_type":"span","marks":["strong"],"text":"After:"}],"markDefs":[],"style":"normal"},{"_key":"1096ff908eac","_type":"block","asset":null,"children":[{"_key":"ae19295042f1","_type":"span","marks":[],"text":"Consumer expenditure is $150,000 \\times 20 = \\$ 3$ million"}],"markDefs":[],"style":"normal"},{"_key":"6059bc3e1d65","_type":"block","asset":null,"children":[{"_key":"d2f472f88b6b","_type":"span","marks":[],"text":"Hence "},{"_key":"636404ad0a6b","_type":"span","marks":["strong"],"text":"in this specific case"},{"_key":"b55d784c9555","_type":"span","marks":[],"text":", there is "},{"_key":"f0578d6d3afa","_type":"span","marks":["em"],"text":"no change"},{"_key":"a5980635fbfa","_type":"span","marks":[],"text":" in consumer expenditure, but they are "},{"_key":"a73028d04d6a","_type":"span","marks":["strong"],"text":"still worse off"},{"_key":"299331bbdd7a","_type":"span","marks":[],"text":" as less consumers can afford and buy the good as it is more expensive."}],"markDefs":[],"style":"normal"},{"_key":"53c48d7f5f13","_type":"block","asset":null,"children":[{"_key":"804a8abc0da9","_type":"span","marks":[],"text":""}],"markDefs":[],"style":"normal"}] [{"_key":"b568b305574c","_type":"block","asset":null,"children":[{"_key":"bb6dd8366915","_type":"span","marks":[],"text":"Consumer expenditure can be "},{"_key":"e41781009425","_type":"span","marks":["strong"],"text":"both higher or lower"},{"_key":"b3c4676fbddd","_type":"span","marks":[],"text":" after the tariff. However they're still worse off either way due to lower consumption."}],"markDefs":[],"style":"normal"}] #### Consumer Surplus [44fc029b5717] * **Before the tariff**, consumer surplus is the area of the triangle above the **world price** and below the demand curve, up till the **quantity bought.** * **After the tariff**, consumer surplus is the area of the triangle above the **world price plus tariff** and below the demand curve, till the **quantity bought.** [{"_key":"40b804e5821a","_type":"block","asset":null,"children":[{"_key":"5818cca57451","_type":"span","marks":[],"text":"Consumer surplus depends on how much is "},{"_key":"d92303364965","_type":"span","marks":["strong"],"text":"actually bought"},{"_key":"d784d8082e07","_type":"span","marks":[],"text":", not just demanded. In this case, as excess demand is "},{"_key":"3567a8f8382b","_type":"span","marks":["strong"],"text":"covered by imports"},{"_key":"93c02da862b0","_type":"span","marks":[],"text":", they're equivalent."}],"markDefs":[],"style":"normal"}] [{"_key":"167cee28d276","_type":"block","asset":null,"children":[{"_key":"c2ebd3acec99","_type":"span","marks":["strong"],"text":"Before:"}],"markDefs":[],"style":"normal"},{"_key":"cbf5bde77b7d","_type":"block","asset":null,"children":[{"_key":"7240cd7103dd","_type":"span","marks":[],"text":"$P_w = 15, Q_d = 200000$ and $P_{max} = 35$"}],"markDefs":[],"style":"normal"},{"_key":"9b41c795c925","_type":"block","asset":null,"children":[{"_key":"bb5b30ae5316","_type":"span","marks":[],"text":"Therefore we can calculate:"}],"markDefs":[],"style":"normal"},{"_key":"4465df6012de","_type":"block","asset":null,"children":[{"_key":"b0b145f1f33c","_type":"span","marks":[],"text":"$$ CS = \\frac{(35-15)\\times 200,000}{2} = 2,000,000$$"}],"markDefs":[],"style":"normal"},{"_key":"72c7e24d875f","_type":"block","asset":null,"children":[{"_key":"31904ad7f8f7","_type":"span","marks":[],"text":"Hence the "},{"_key":"53d9503e7256","_type":"span","marks":["strong"],"text":"consumer surplus"},{"_key":"d7ce62b2929d","_type":"span","marks":[],"text":" was $\\$ 2$ million.\n\n"},{"_key":"c854b45852c9","_type":"span","marks":["strong"],"text":"After:"}],"markDefs":[],"style":"normal"},{"_key":"4dfb9dd198e3","_type":"block","asset":null,"children":[{"_key":"85b1636ddf34","_type":"span","marks":[],"text":"$P_w +t= 20, Q_d = 150$ thousand and $P_{max} = 35$"}],"markDefs":[],"style":"normal"},{"_key":"624a7915d15b","_type":"block","asset":null,"children":[{"_key":"1919f740161a","_type":"span","marks":[],"text":"Therefore we can calculate:"}],"markDefs":[],"style":"normal"},{"_key":"51e4d208cb84","_type":"block","asset":null,"children":[{"_key":"84af558dafb6","_type":"span","marks":[],"text":"$$ CS = \\frac{(35-20)\\times 150,000}{2} = 1,125,000$$"}],"markDefs":[],"style":"normal"},{"_key":"294c81785d17","_type":"block","asset":null,"children":[{"_key":"2ff93f06cabd","_type":"span","marks":[],"text":"Hence the "},{"_key":"bfa68e15056a","_type":"span","marks":["strong"],"text":"consumer surplus"},{"_key":"039e88448271","_type":"span","marks":[],"text":" was $\\$ 1.125$ million"}],"markDefs":[],"style":"normal"},{"_key":"0e3790d7e268","_type":"block","asset":null,"children":[{"_key":"c17342b2291f","_type":"span","marks":[],"text":""}],"markDefs":[],"style":"normal"},{"_key":"f5622d8c44aa","_type":"block","asset":null,"children":[{"_key":"6e2a67cae880","_type":"span","marks":[],"text":"Therefore the change in consumer surplus was a "},{"_key":"760d1119f11f","_type":"span","marks":["strong"],"text":"decrease "},{"_key":"ec7a96d53117","_type":"span","marks":[],"text":"of $\\$ 875,000$"}],"markDefs":[],"style":"normal"}] #### Producer Revenue (Domestic) [block_85] For (domestic) producer revenue: * **Before tariff** we multiply **world price** by the initial quantity supplied. * **After tariff** we multiply **world price plus tariff** with the new quantity supplied. * As both price and quantity supplied **increase**, producers **always** earn more revenue. [{"_key":"4de533903ff9","_type":"block","asset":null,"children":[{"_key":"06dd1eaa5549","_type":"span","marks":["strong"],"text":"Before:"}],"markDefs":[],"style":"normal"},{"_key":"a3030238c256","_type":"block","asset":null,"children":[{"_key":"ca8d2c5df6e3","_type":"span","marks":[],"text":"The revenue is $50,000 \\times 15 = \\$ 0.75$ million"}],"markDefs":[],"style":"normal"},{"_key":"cbb2f3fb3858","_type":"block","asset":null,"children":[{"_key":"3c4e724cd76a","_type":"span","marks":["strong"],"text":"After:"}],"markDefs":[],"style":"normal"},{"_key":"315d4b942c02","_type":"block","asset":null,"children":[{"_key":"eac7986872a5","_type":"span","marks":[],"text":"The revenue is $75,000 \\times 20 = \\$ 1.5$ million"}],"markDefs":[],"style":"normal"},{"_key":"338ed105b1bc","_type":"block","asset":null,"children":[{"_key":"4fe0215a0eff","_type":"span","marks":[],"text":"Hence the revenue of domestic producers "},{"_key":"df09ff8a253a","_type":"span","marks":["strong"],"text":"increased by:"}],"markDefs":[],"style":"normal"},{"_key":"a667ed1ca5af","_type":"block","asset":null,"children":[{"_key":"e912356661cc","_type":"span","marks":[],"text":"$ 1.5 - 0.75 = \\$ 0.75$ million"}],"markDefs":[],"style":"normal"},{"_key":"57f96c3b5b1b","_type":"block","asset":null,"children":[{"_key":"92050fb5cd94","_type":"span","marks":[],"text":" "}],"markDefs":[],"style":"normal"}] #### Producer Surplus [2cfd26738b30] * **Before the tariff**, producer surplus is the area of the triangle below the **world price** and above the supply curve, up till the **quantity sold**. * **After the tariff**, producer surplus is the area of the triangle below the **world price plus tariff** and above the supply curve, till the **quantity sold**. [{"_key":"167cee28d276","_type":"block","asset":null,"children":[{"_key":"c2ebd3acec99","_type":"span","marks":["strong"],"text":"Before:"}],"markDefs":[],"style":"normal"},{"_key":"cbf5bde77b7d","_type":"block","asset":null,"children":[{"_key":"7240cd7103dd","_type":"span","marks":[],"text":"$P_w = 15, Q_s = 50000$ and $P_{min} = 5$"}],"markDefs":[],"style":"normal"},{"_key":"9b41c795c925","_type":"block","asset":null,"children":[{"_key":"bb5b30ae5316","_type":"span","marks":[],"text":"Therefore we can calculate:"}],"markDefs":[],"style":"normal"},{"_key":"4465df6012de","_type":"block","asset":null,"children":[{"_key":"b0b145f1f33c","_type":"span","marks":[],"text":"$$ PS = \\frac{(15-5)\\times 50,000}{2} = 250,000$$"}],"markDefs":[],"style":"normal"},{"_key":"72c7e24d875f","_type":"block","asset":null,"children":[{"_key":"31904ad7f8f7","_type":"span","marks":[],"text":"Hence "},{"_key":"6f886e25c563","_type":"span","marks":["strong"],"text":"producer surplus"},{"_key":"d7ce62b2929d","_type":"span","marks":[],"text":" was $\\$ 250,000$.\n\n"},{"_key":"c854b45852c9","_type":"span","marks":["strong"],"text":"After:"}],"markDefs":[],"style":"normal"},{"_key":"4dfb9dd198e3","_type":"block","asset":null,"children":[{"_key":"85b1636ddf34","_type":"span","marks":[],"text":"$P_w +t= 20, Q_s = 75000$, and $P_{min} = 5$"}],"markDefs":[],"style":"normal"},{"_key":"624a7915d15b","_type":"block","asset":null,"children":[{"_key":"1919f740161a","_type":"span","marks":[],"text":"Therefore we can calculate:"}],"markDefs":[],"style":"normal"},{"_key":"51e4d208cb84","_type":"block","asset":null,"children":[{"_key":"84af558dafb6","_type":"span","marks":[],"text":"$$ CS = \\frac{(20-5)\\times 75,000}{2} = 562,500$$"}],"markDefs":[],"style":"normal"},{"_key":"294c81785d17","_type":"block","asset":null,"children":[{"_key":"2ff93f06cabd","_type":"span","marks":[],"text":"Hence the "},{"_key":"bfa68e15056a","_type":"span","marks":["strong"],"text":"producer surplus"},{"_key":"039e88448271","_type":"span","marks":[],"text":" was $\\$ 562,500$."}],"markDefs":[],"style":"normal"},{"_key":"0e3790d7e268","_type":"block","asset":null,"children":[{"_key":"c17342b2291f","_type":"span","marks":[],"text":""}],"markDefs":[],"style":"normal"},{"_key":"f5622d8c44aa","_type":"block","asset":null,"children":[{"_key":"6e2a67cae880","_type":"span","marks":[],"text":"Therefore the change in producer surplus was a "},{"_key":"12b152d65d2a","_type":"span","marks":["strong"],"text":"increase "},{"_key":"d530f411bbc7","_type":"span","marks":[],"text":"of $\\$ 312,500$."}],"markDefs":[],"style":"normal"}] #### Government Revenue [block_107] The** revenue from tariff **is calculated by **multiplying** the tariff per unit $t$ with the imports after the tariff represented by area $e$. [{"_key":"176fd8ee0656","_type":"block","asset":null,"children":[{"_key":"380e11afe584","_type":"span","marks":[],"text":"At $t=5$, $75,000$ units are imported."}],"markDefs":[],"style":"normal"},{"_key":"3aa639c02cd6","_type":"block","asset":null,"children":[{"_key":"e4d817834149","_type":"span","marks":[],"text":"Hence, the "},{"_key":"b103ed67332d","_type":"span","marks":["strong"],"text":"revenue"},{"_key":"bd654add9249","_type":"span","marks":[],"text":" for the government is: $$ 75,000 \\times 5 = \\$ 375,000 $$"}],"markDefs":[],"style":"normal"}] #### Welfare Loss [block_112] The areas of triangles $d + f$ showcase the **welfare** loss where: 1. The first triangle can be calculated by **multiplying** the **change** in quantity supplied by the tariff _(then dividing by two)._ 2. The second triangle can be calculated by **multiplying** the **change** in quantity demanded by the tariff _(then dividing by two)._ [{"_key":"3fff94c4d116","_type":"block","asset":null,"children":[{"_key":"f9c62a464a12","_type":"span","marks":["strong"],"text":"First welfare loss (triangle):"}],"markDefs":[],"style":"normal"},{"_key":"1029a86928da","_type":"block","asset":null,"children":[{"_key":"d5a9fe9d50a6","_type":"span","marks":[],"text":"$$ \\frac{25,000 \\times 5}{2} = \\$ 62,500 $$"}],"markDefs":[],"style":"normal"},{"_key":"97b18254c64d","_type":"block","asset":null,"children":[{"_key":"3eb34f71e96f","_type":"span","marks":["strong"],"text":"Second welfare loss (triangle):"}],"markDefs":[],"style":"normal"},{"_key":"02b39bb5c22f","_type":"block","asset":null,"children":[{"_key":"310a4f840d0e","_type":"span","marks":[],"text":"$$ \\frac{50,000 \\times 5}{2} = \\$ 125,000 $$"}],"markDefs":[],"style":"normal"},{"_key":"c365d5d62a43","_type":"block","asset":null,"children":[{"_key":"5164afeb9fbb","_type":"span","marks":[],"text":"Hence "},{"_key":"0d4ae2c83597","_type":"span","marks":["strong"],"text":"total"},{"_key":"46fbf222fd5a","_type":"span","marks":[],"text":" "},{"_key":"a9dfa6454f65","_type":"span","marks":["strong"],"text":"welfare loss"},{"_key":"9c8a4af544cc","_type":"span","marks":[],"text":" is: $$ \\$ 187,500 $$"}],"markDefs":[],"style":"normal"}] #### Foreign Producers [block_117] Foreign producers' revenues will fall by the amount that **import expenditure** falls by. [{"_key":"c69bb363dde3","_type":"block","asset":null,"children":[{"_key":"b0113afa5403","_type":"span","marks":[],"text":"From the example "},{"_key":"afadad9abcda","_type":"span","marks":["strong"],"text":"above,"},{"_key":"86cba3ae4b36","_type":"span","marks":[],"text":" the import expenditure and hence the revenue of foreign producers fell by $\\$ 1.125 $ million. "}],"markDefs":[],"style":"normal"}] [{"_key":"986cbfc3e67b","_type":"block","asset":null,"children":[{"_key":"2afeb267d7841","_type":"span","marks":[],"text":"The U.S.-China Trade War and Steel Tariffs"}],"markDefs":[],"style":"h3"},{"_key":"5f25cb51859a","_type":"block","asset":null,"children":[{"_key":"23c097b1ac4c0","_type":"span","marks":[],"text":"Context:"}],"markDefs":[],"style":"h4"},{"_key":"07af4bf0c3ec","_type":"block","asset":null,"children":[{"_key":"0903c4644ba90","_type":"span","marks":[],"text":"In 2018, the United States imposed a "},{"_key":"307a77d9fc78","_type":"span","marks":["strong"],"text":"25% tariff"},{"_key":"edbb52429bb1","_type":"span","marks":[],"text":" on steel imports and a "},{"_key":"90009512a9d1","_type":"span","marks":["strong"],"text":"10% tariff "},{"_key":"1927764152ba","_type":"span","marks":[],"text":"on aluminium imports. The move was primarily aimed at reducing the U.S.'s reliance on foreign steel and boosting domestic production. China, a major exporter of steel to the U.S., retaliated with tariffs on American goods like soybeans and automobiles."}],"markDefs":[],"style":"normal"},{"_key":"8cd23dfab0c4","_type":"block","asset":null,"children":[{"_key":"124fc43b555e0","_type":"span","marks":[],"text":"Effects of the Tariffs:"}],"markDefs":[],"style":"h3"},{"_key":"ce788dd9fd08","_type":"block","asset":null,"children":[{"_key":"ad80587906cc0","_type":"span","marks":["strong"],"text":"Domestic Producers Benefited:"}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"a7d16d0d7ffb","_type":"block","asset":null,"children":[{"_key":"490fc771eb250","_type":"span","marks":[],"text":"U.S. steelmakers experienced"},{"_key":"a5fb6ea28e2e","_type":"span","marks":["strong"],"text":" increased demand"},{"_key":"18d08e9ca66c","_type":"span","marks":[],"text":" for their products as imported steel became more expensive. "}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"14819f95cca7","_type":"block","asset":null,"children":[{"_key":"c113351ce4e1","_type":"span","marks":[],"text":"This led to a temporary "},{"_key":"3ec11dddb715","_type":"span","marks":["strong"],"text":"rise in production"},{"_key":"5bce211dad57","_type":"span","marks":[],"text":" and "},{"_key":"1a7f8fe30310","_type":"span","marks":["strong"],"text":"job creation"},{"_key":"515aa7753b3c","_type":"span","marks":[],"text":" within the domestic steel industry."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"dd389e0260b2","_type":"block","asset":null,"children":[{"_key":"c650408d9ebe0","_type":"span","marks":["strong"],"text":"Increased Costs for U.S. Companies:"}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"8b4664f153bb","_type":"block","asset":null,"children":[{"_key":"2902d9d414d70","_type":"span","marks":[],"text":"Industries that rely heavily on steel and aluminum (e.g., construction, automotive, and manufacturing)"},{"_key":"250ae0544a38","_type":"span","marks":["strong"],"text":" faced higher input costs. "}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"d40a6f7235cf","_type":"block","asset":null,"children":[{"_key":"cfcee4e3f42e0","_type":"span","marks":["strong"],"text":"Higher Consumer Prices:"}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"df56d223c2d5","_type":"block","asset":null,"children":[{"_key":"a2998aa614ec0","_type":"span","marks":[],"text":"Consumers "},{"_key":"bc1427a4d70a","_type":"span","marks":["strong"],"text":"indirectly bore "},{"_key":"a3cb3779337c","_type":"span","marks":[],"text":"the cost of tariffs through higher prices for goods like cars and household appliances."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"b23a1daa472b","_type":"block","asset":null,"children":[{"_key":"bcdf6ede0a450","_type":"span","marks":["strong"],"text":"Global Trade Tensions:"}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"cff6ef17f1a0","_type":"block","asset":null,"children":[{"_key":"55e398b323710","_type":"span","marks":[],"text":"The tariffs escalated trade tensions between the U.S. and China, leading to a broader trade war that impacted"},{"_key":"8f4a8ec74d8e","_type":"span","marks":["strong"],"text":" global supply chains "},{"_key":"c4255c7d9540","_type":"span","marks":[],"text":"and slowed economic growth."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"8215c587edb6","_type":"block","asset":null,"children":[{"_key":"381e6d83c5270","_type":"span","marks":[],"text":"Outcomes:"}],"markDefs":[],"style":"h3"},{"_key":"1081ad5baaef","_type":"block","asset":null,"children":[{"_key":"9a2a12cdb32a0","_type":"span","marks":[],"text":"The U.S. steel industry saw short-term gains, but downstream industries like manufacturing "},{"_key":"2c0a533af79c","_type":"span","marks":["strong"],"text":"suffered from higher input costs"},{"_key":"148b46d90694","_type":"span","marks":[],"text":" and reduced competitiveness."}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"3ba8f5da9ae5","_type":"block","asset":null,"children":[{"_key":"6bb042c659920","_type":"span","marks":[],"text":"Retaliatory tariffs from China hurt American farmers, leading to "},{"_key":"6a959489dacd","_type":"span","marks":["strong"],"text":"government subsidies"},{"_key":"066cb44a8124","_type":"span","marks":[],"text":" to offset their losses."}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"0517d09f40f8","_type":"block","asset":null,"children":[{"_key":"89dbfe180bd50","_type":"span","marks":[],"text":"Questions:"}],"markDefs":[],"style":"h3"},{"_key":"83377e133485","_type":"block","asset":null,"children":[{"_key":"690d0c6b4d340","_type":"span","marks":[],"text":"Were the tariffs successful in protecting U.S. steelmakers, or did their negative effects on other industries outweigh the benefits?"}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"fb179a6cc1d9","_type":"block","asset":null,"children":[{"_key":"94a8e60b38520","_type":"span","marks":[],"text":"How could the U.S. have achieved its objectives without triggering a trade war or hurting its own consumers?"}],"level":1,"listItem":"number","markDefs":[],"style":"normal"}] [{"_key":"block_130","_type":"block","asset":null,"children":[{"_key":"ip9ZSUgFyzGIsQgTfwtnb6","_type":"span","markDefs":[],"marks":[],"text":"How do governments balance the short-term benefits of protecting domestic industries with the long-term costs of reduced efficiency and higher consumer prices?"}],"markDefs":[],"style":"normal"}] [{"_key":"d24ef74aecd7","_type":"block","asset":null,"children":[{"_key":"a1be68c18aeb","_type":"span","marks":[],"text":"Explain how a tariff works using a diagram."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"664c20404c45","_type":"block","asset":null,"children":[{"_key":"5d91454c002c","_type":"span","marks":[],"text":"Discuss the impacts on stakeholders."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"7995a4946daf","_type":"block","asset":null,"children":[{"_key":"c1963eec803e","_type":"span","marks":[],"text":"Construct a labelled tariff diagram using letters (don't use numbers) as values and calculate."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"}]