Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 9 - Part III - Application: International Trade - Problems and Applications - Page 190: 2

Answer

Please see the graph.

Work Step by Step

Before the tariff, consumers demanded $Q^{D}_{0}$ autos and producers supplied $Q^{S}_{0}$ autos. (The remaining autos were imports.) Consumer surplus was the sum of areas $A+B+C+D+E+F$, and producer surplus was area $G$. The price of autos was $P_{W}$. After the tariff was imposed, the price of autos increased to $P_{W+T}$. Consumers demanded $Q^{D}_{1}$ autos and producers supplied $Q^{S}_{1}$ autos. (The remaining autos were imports.) Consumer surplus shrunk to the sum of areas $A+B$, while producer surplus increased to the sum of areas $C+G$. Tax revenue increased to area $E$, and the deadweight loss increased to the sum of areas $D+F$. Producers gained area $C$ from consumers, and the tax revenue was gained from area $E$ from consumers. Since consumers lost the sum of areas $C+D+E+F$, and areas $C$ and $E$ are already claimed, the deadweight loss created by the tariff is the sum of areas $D+F$.
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