TRADE RESTRICTIONS and TOTAL SURPLUS
The supply and demand framework shows the gains in consumer and producer surplus that occur when nations freely
trade, and the efficiency losses (deadweight loss) that occur when nations restrict trade. (Consider what happens when a
government establishes a price control (price floor or ceiling) or a quantity control (quota) and the surpluses, shortages,
and deadweight loss that occur, respectively.)
1. How does an unrestricted, free market maximize total surplus?
2. Why does restricting the free market diminish total surplus?
3. What is “allocative efficiency”? (look up in your e-book)
The graph below depicts the DOMESTIC demand and DOMESTIC supply of textiles in a nation. In the absence of trade,
the equilibrium price is Pd and the equilibrium quantity is Qd.
Suppose that other nations can produce textiles at lower costs, and as a result, the world price is Pw.
4. Looking at the graph below, what would be the quantity demanded of the good at the world price, Pw?
5. How does this compare to the quantity demanded at the domestic price, Pd?
6. To account for the domestic quantity demanded at the world price, Pw, how could a country increase consumer
surplus through unrestricted trade? In other words, how would the domestic country allow its consumers to buy
the quantity Q2 when its domestic producers would only supply at Q1 (if the price is Pw)?
Before Trade:
26. Consumer Surplus =
27. Producer Surplus =
28. Total Surplus =
After Trade:
29. Consumer Surplus =
30. Producer Surplus =
31. Total Surplus =
The next graph shows what happens to total surplus when the government imposes a tariff on imported
textiles. The world price with the tariff added is labeled as Pt.
13. What is the quantity demanded at the world price (Pw)?
14. How much would the country import at the world price Pw? (Remember, the supply curve shows what
domestic producers make.)
15. What is the quantity demanded with the tariff included (Pt)?
16. How much would the country import when a tariff is added to the world price (Pt)?
Before Tariff:
17. Consumer Surplus =
18. Producer Surplus =
19. Government Revenue =
(Hint, there is no tariff, yet…)
20. Total Surplus =
After Tariff:
21. Consumer Surplus =
22. Producer Surplus =
23. Government Revenue =
(Look at quantity imported compared to quantity
supplied domestically.)
24. Total Surplus =
25. Deadweight Loss =
(Look between the quantity demanded at the tariff
price and the curves; there are two areas of DWL.)
26. What impact does the tariff have on total surplus? Why?