Session 8 Analysis of a Tariff

Tariff Tariff is a tax on importing a good or service into a country, usually collected by customs official at a place of entry.  A Specific tariff The money amount per unit of import  An Ad valorem The percentage of the estimated market value of the goods when they reach the importing country

The U.S. Market for Bicycle with Free Trade Sd (Domestic Supply) Dd (Domestic Demand) World Price S0 = 0.6D0 = 1.6 Import M0 =1.0

The Effect of A Tariff on Producer (Small Importing Nation)

Sd (Domestic Supply) World Price Producer Surplus Domestic Price with Tariff 330 Increased Producer Surplus

Consumer Surplus The Effect of a Tariff on Consumers Dd (Domestic Demand) World Price D0 = 1.6 Domestic Price with Tariff 330 New Consumer Surplus Lost Consumer Surplus

The Tariff As Government Revenue Sd (Domestic Supply) Dd (Domestic Demand) World Price S0D0 Import without tariff Domestic Price with Tariff 330 S1D1 Import with tariff Government Revenue

The Net Nation Loss from Tariff Sd (Domestic Supply) Dd (Domestic Demand) World Price S0D0 Import without tariff Domestic Price with Tariff 330 S1D1 Import with tariff Lost consumer surplusIncreased Producer Surplus Government Revenue Deadweight Loss

One-dollar, One-vote Metric Every dollar of gain or loss is just as important as every other dollar of gain and loss, regardless of who the gainers or losers are. Consumers Lose  What would happen if the customers are more important than the producer?

The Effect of A Tariff on Producer (Large Importing Nation) Importing country Impose the tariff. Exporting country reduce the price.

Sd (Domestic Supply) Dd (Domestic Demand) World Price Domestic Price with tariff

Lost consumer surplusIncreased Producer Surplus Government Revenue Paid by foreign exporters Paid by domestic importers Deadweight Loss

With small amount of tariff, the sum of deadweight loss is less than the tariff paid by foreign exporter. As such, the large importing country gain from impose the tariff.

World Price without tariff Price with tariff Exporter’s Price