The domestic supply and demand curves for good X in Zimbostan are shown in the figure below.
Zimbostan is a large country in the world market for good X. Currently the world price of good X is $30
and at this price Zimbostan produces 1 unit domestically, imports 6 units, and domestic consumption is
7 units.
With free trade at the world price = $3:
Consumer Surplus = _________________
Producer Surplus = _________________
Government Revenue = __________________
The domestic supply and demand curves for good X in Zimbostan are shown in the figure below.
Zimbostan is a large country in the world market for good X. Currently the world price of good X is $30
and at this price Zimbostan produces 1 unit domestically, imports 6 units, and domestic consumption is
7 units.
With free trade at the world price = $3:
Consumer Surplus = ____$245_____________
Producer Surplus = ______$5___________
Government Revenue = _____$0___________
If Zimbostan imposes an import tariff = $30 Zimbostan’s imports
will decrease, and given that Zimbostan is a large player in the
world market for X, and given the inelastic nature of the world
supply of good X, the world price of X will fall to $2 (see chart to
the right showing the action in the world market for X)
So, Zimbostan imposes a $30 tariff and the world price fall from
$30 to $20. This means the $30 tariff raises the price of good X in
Zimbostan from $30 to $50. That is a $30 tariff causes the
domestic price to increase by only $20. Part of the burden of the tariff is born by foreign producers of
good X.
After the tariff
Consumer Surplus = _________________
Protection Effect = ________________
Producer Surplus = _________________
Consumption Effect = ______________
Government Revenue = __________________
Terms of Trade Effect = ___________
So, Zimbostan imposes a $30 tariff and the world price fall from $30 to $20. This means the 30$ tariff
raises the price of good X in Zimbostan from $30 to $50. That is a $30 tariff causes the domestic price to
increase by only $20. Part of the burden of the tariff is born by foreign producers of good X.
After the tariff
Consumer Surplus = _______$125__________
Protection Effect = ________________
Producer Surplus = _______$45__________
Consumption Effect = ______________
Government Revenue = ________$60_______
Terms of Trade Effect = ___________
The difference in total surplus before and after the tariff are related to the sizes of the areas shaded in
the diagram below. That tariff generates inefficiencies in terms of the protection and consumption
effects shaded in yellow. These are negatives. The positive effect is the terms of trade effect (shaded in
gray below) that arises because import prices have decreased by $10 (for the 2 units imported.
-$20
-$20
+$20