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Tariff Impact on Domestic Markets

The document analyzes the impact of a tariff on supply and demand curves in a domestic market. It shows the market equilibrium with free trade at a world price of $10 and calculates quantities supplied, demanded, and imported. It then models the effect of a $5 tariff, showing the new domestic price of $15 and resulting changes in quantity supplied, demanded, imported, and revenue for domestic producers, foreign producers, and the government. The tariff leads to a loss in consumer choice but gains for domestic producers and government revenue, while decreasing imports and foreign producer revenue.

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zehracanik1234
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111 views2 pages

Tariff Impact on Domestic Markets

The document analyzes the impact of a tariff on supply and demand curves in a domestic market. It shows the market equilibrium with free trade at a world price of $10 and calculates quantities supplied, demanded, and imported. It then models the effect of a $5 tariff, showing the new domestic price of $15 and resulting changes in quantity supplied, demanded, imported, and revenue for domestic producers, foreign producers, and the government. The tariff leads to a loss in consumer choice but gains for domestic producers and government revenue, while decreasing imports and foreign producer revenue.

Uploaded by

zehracanik1234
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Supply and demand

curves in DOMESTIC
MARKET

Blue line - Equilibrium price and demand in domestic market with NO free trade

Calculate the following (with free trade) (Purple Line)


World price (WP): $10 (Lowest price for import competing)

Quantity supplied at WP: 100 (Following WP to see quantity supplied domestically)

Quantity demanded at WP: 300 (Following WP to see quantity demanded domestically at cheaper
cost)

Quantity of imports before tari : 200 (300-100: di erence between domestic supply and demand
to meet customer demand, is imported)

Domestic supplier revenue before the tari : 10 x 100 = 1000 (Revenue = price x quantity)

Calculate the following (after the tari ) (Green Line)


Size of tari : $5 (Above world price, below equilibrium: market without free trade)

Price after tari : $15

Quantity supplied after the tari : 150 (Following WP+T to see quantity supplied domestically)

Quantity demanded after the tari : 250 (Following WP+T to see quantity demanded domestically)

Quantity of imports after tari : 100 (250 - 150: di erence between domestic supply and
demanded at new price)

Price received by domestic rms after the tari : $15 (Receive new price with tari )

Price received by foreign producers: $10 (Still receive WP, tari is kept by govt.)

Domestic supplier revenue after the tari : 15 x 150 = 2250

Impact of the tari :


Loss in consumer choice: 300 - 250 = 50 (Contraction of demand from purple line to green line
due to price increase)

Gain to domestic producer revenue: 2250 - 1000 = 1250 (revenue before tari at world price -
revenue after tari and increase in price)

Government revenue: 5 x 100 = 500 (size of tari x number of imports AFTER tari )

Decrease in imports: 200 - 100 = 100 (di erence of imports at WP (purple line) and imports at
WP+T (green line)

Loss of revenue to foreign producers: 100 x 10 = 1000 (decrease in imports x world price)
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Supply and demand
curves in DOMESTIC
MARKET

Calculate the following (with free trade) (Purple Line)


World price (WP): $5

Quantity supplied at WP: 1000

Quantity demanded at WP: 4000

Quantity of imports before tari : 3000 (4000-1000)

Domestic supplier revenue before the tari : 5 x 1000 = 5000 (Revenue = price x quantity)

Calculate the following (after the tari ) (Green Line)


Size of tari : $3

Price after tari : $8

Quantity supplied after the tari : 2000

Quantity demanded after the tari : 3000

Quantity of imports after tari : 3000 - 2000 = 1000

Price received by domestic rms after the tari : $8

Price received by foreign producers: $5

Domestic supplier revenue after the tari : 8 x 2000 = 16 000

Impact of the tari :


Loss in consumer choice: 4000 - 3000 = 1000

Gain to domestic producer revenue: 16 000 - 5000 = 11 000

Government revenue: 3 x 1000 = 3000

Decrease in imports: 3000 - 1000 = 2000

Loss of revenue to foreign producers: (5 x 3000) - (5 x 1000) = 10 000


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