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

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 P* = $.60 World price IMPORTS B A INCREASE IN CONSUMER SURPLUS DECREASE IN PRODUCER SURPLUS INCREASE IN TOTAL SURPLUS

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 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?

Trade and welfareslide 4 S D Q P P* = $1 WATER MARKET 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

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 World PriceP = Z$30 World Price Plus Tariff P = Z$40 IMPORTS IMPORTS - 70 GOVT. REVENUE - Z$ 700

Trade and welfareslide 6 DEADWEIGHT LOSS S D Q P P* = $1 WATER MARKET 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

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

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 World PriceP = Z$30 World Price Plus Tariff P = Z$40 IMPORTS IMPORTS - 70 GOVT. REVENUE - Z$ 700 International Trade Begins Small Country Zimbabwe Z$10

Trade and welfareslide 9 S D Q P P* = $1 WATER MARKET THE DOMESTIC MARKET FOR WATER WHAT HAPPENS WHEN A TARIFF IS IMPOSED ? INTERNATIONAL TRADE BEGINS LARGE COUNTRY UNITED STATES 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

Trade and welfareslide 10 S D Q P P* =Z$50 WATER MARKET 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 INCREASE IN PRODUCER SURPLUS DECREASE IN CONSUMER SURPLUS GOVERNMENT REVENUE DEADWEIGHT LOSS DEADWEIGHT LOSS