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)
World Price
Dd (Domestic Demand)
S0 = 0.6
D0 = 1.6
Import
M0 =1.0
The Effect of A Tariff on Producer
(Small Importing Nation)
Increased
Producer
Surplus
Sd (Domestic Supply)
Producer
Surplus
330
Domestic Price with Tariff
World Price
The Effect of a Tariff on Consumers
Consumer
Surplus
New
Consumer
Surplus
Domestic Price with Tariff
World Price
330
Lost
Consumer
Surplus
Dd (Domestic Demand)
D0 = 1.6
The Tariff As Government Revenue
Sd (Domestic Supply)
Government Revenue
Domestic Price with Tariff
World Price
330
Dd (Domestic Demand)
S0 S1
D1 D0
Import with tariff
Import without tariff
The Net Nation Loss from Tariff
Increased Producer
Surplus
Sd (Domestic Supply)
Lost consumer surplus
Government Revenue
Domestic Price with Tariff
World Price
330
Deadweight Loss
S0 S1
D1 D0
Import with tariff
Import without tariff
Dd (Domestic Demand)
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)
Domestic Price with tariff
World Price
Dd (Domestic Demand)
Increased Producer
Surplus
Lost consumer surplus
Government Revenue
Paid by domestic importers
Paid by foreign exporters
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.
Price with tariff
Exporter’s Price
World Price without tariff