2. Trade and welfareslide 1 S D Q P Q* P* = $1 The diagram below shows the U.S. domestic market for water. No trade is taking place. WATER MARKET

3. Trade and welfareslide 2 A B S D Q P 100 P* = $1 What happens with trade? What are the welfare effects of trade? WATER MARKET 40160 P* = $.60 World price IMPORTS - 120 B A INCREASE IN CONSUMER SURPLUS DECREASE IN PRODUCER SURPLUS INCREASE IN TOTAL SURPLUS

4. Trade and welfareslide 3 S D Q P 100 P* = $10 The diagram below shows the U.S. domestic market for flags. No trade is taking place. FLAG MARKET 60150 EXPORTS - 90 INCREASE IN PRODUCER SURPLUS DECREASE IN CONSUMER SURPLUS INCREASE IN TOTAL SURPLUS WORLD PRICE P = $12 WHAT HAPPENS WITH TRADE? WHAT ARE THE WELFARE EFFECTS?

5. Trade and welfareslide 4 S D Q P P* = $1 WATER MARKET 40160 P* = $.60 World price World Price Plus Tariff P = $.80 THE DOMESTIC MARKET FOR WATER WHAT HAPPENS WHEN A TARIFF IS IMPOSED ? INTERNATIONAL TRADE BEGINS INCREASE IN DOMESTIC PRICE 140 REDUCTION IN QUANTITY DEMANDED 70 INCREASE IN QUANTITY SUPPLIED INCREASE IN PRODUCER SURPLUS DECREASE IN CONSUMER SURPLUS GOVERNMENT REVENUE

6. Trade and welfareslide 5 S D Q P 100 P* = Z$50 The diagram below shows the domestic market for water in Zimbabwe. No trade is taking place. WATER MARKET 20 60 180 130 World PriceP = Z$30 World Price Plus Tariff P = Z$40 IMPORTS - 160 IMPORTS - 70 GOVT. REVENUE - Z$ 700

7. Trade and welfareslide 6 DEADWEIGHT LOSS S D Q P P* = $1 WATER MARKET 40160 THE DOMESTIC MARKET FOR WATER WHAT HAPPENS WHEN A TARIFF IS IMPOSED ? INTERNATIONAL TRADE BEGINS World price P* = $.60 Domestic Price after Tariff P = $.80 World price after tariff 140 DECREASE IN CONSUMER SURPLUS 70 GOVERNMENT REVENUE DOMESTIC PAID - $4 DEADWEIGHT LOSS 1/2($.20X50) = $5 GOVERNMENT REVENUE FOREIGN PAID - $4 INCREASE IN PRODUCER SURPLUS

8. Trade and welfareslide 7 S D Q P Q* P* = $1 The diagram below shows the U.S. domestic market for water. No trade is taking place. WATER MARKET

9. Trade and welfareslide 8 S D Q P 100 P* = Z$50 The diagram below shows the domestic market for water in Zimbabwe. No trade is taking place. WATER MARKET 20 60 180 130 World PriceP = Z$30 World Price Plus Tariff P = Z$40 IMPORTS - 160 IMPORTS - 70 GOVT. REVENUE - Z$ 700 International Trade Begins Small Country Zimbabwe Z$10

10. Trade and welfareslide 9 S D Q P P* = $1 WATER MARKET 40160 THE DOMESTIC MARKET FOR WATER WHAT HAPPENS WHEN A TARIFF IS IMPOSED ? INTERNATIONAL TRADE BEGINS LARGE COUNTRY UNITED STATES 140 70 GOVERNMENT REVENUE- DOMESTIC PAID $ 14 World price Before tariff P* = $.60 Domestic Price after Tariff GOVERNMENT \ REVENUE- FOREIGN PAID $14 P = $.80 World price after tariff P* = $.40

11. Trade and welfareslide 10 S D Q P P* =Z$50 WATER MARKET 20180 P* =Z$30 World price World Price Plus Tariff P =Z$ 40 THE DOMESTIC MARKET FOR WATER WHAT HAPPENS WHEN A TARIFF IS IMPOSED ? INTERNATIONAL TRADE BEGINS 130 60 INCREASE IN PRODUCER SURPLUS DECREASE IN CONSUMER SURPLUS GOVERNMENT REVENUE DEADWEIGHT LOSS DEADWEIGHT LOSS