a) Effect of Pre-Tariff and After-Tariff Situations
Pre-Tariff Situation: At the world price (PW) of 20 taka, the domestic market is in a state of free
trade. BD consumers demand 40 kg of rice, but domestic producers only supply 10 kg. The difference
of 30 kg is met through imports.
After-Tariff Situation: A 100% ad valorem tariff (a tax based on a percentage of the commodity's
value) is imposed. This doubles the domestic price to 40 taka.
o Consumption Effect: Domestic consumption will decrease as the higher price discourages
consumers.
o Production Effect: Domestic production will increase as the higher price incentivizes local
farmers to expand output.
o Trade Effect: Imports will decline because the gap between domestic demand and supply
narrows at the higher price.
b) Calculation of Consumer and Producer Surplus
While the exact new quantities at 40 taka are not provided in your query, the sources define the
calculation as follows:
Consumer Surplus: This is the difference between what consumers are willing to pay (the area under
the demand curve) and what they actually pay. The tariff leads to a reduction in consumer surplus,
represented by the area of a trapezoid (labeled a+b+c+d in the sources) between the 20 taka and 40
taka price levels.
Producer Surplus: Also known as rent, this is the area above the supply curve and below the price
line. The tariff results in an increase in producer surplus (labeled area a), which is the additional
revenue producers receive above their costs for both their original and newly produced output.
c) Cost and Benefit of the Tariff
The sources break down the redistribution of the lost consumer surplus into four areas:
1. Redistribution Effect (Area a): A benefit to domestic producers in the form of increased rent.
2. Revenue Effect (Area c): A benefit to the government, calculated as the Tariff ($20) × Quantity of
Imports after the tariff.
3. Production Distortion/Protection Cost (Area b): A deadweight loss to the economy because
resources are shifted from more efficient industries to less efficient domestic rice production.
4. Consumption Distortion (Area d): A deadweight loss because the artificial price increase distorts
consumption patterns, causing consumers to lose more satisfaction than the government or producers
gain.
d) Effect of a 10 kg Import Quota
If the government replaces the tariff with a quota of 10 kg:
The domestic price will rise to the point where the quantity demanded equals the domestic supply
plus the 10 kg allowed by the quota.
If this 10 kg limit is more restrictive than the imports under the 100% tariff, the price will rise above
40 taka.
Revenue vs. Rents: Unlike a tariff, the "revenue" (Area c) does not automatically go to the
government. If the government auctions import licenses, it collects the revenue. If it gives licenses
away, the importing firms reap monopoly profits or "rents".
e) Difference Between Tariff and Quota with Increasing Demand
The sources highlight a crucial difference when demand for rice increases:
With an Import Tariff: The domestic price remains fixed at the world price plus the tariff (40 taka).
Consequently, domestic production stays the same, while consumption and imports increase to meet
the new demand.
With an Import Quota: Because the volume of imports is strictly capped (at 10 kg), an increase in
demand will drive the domestic price even higher. This results in greater domestic production but
keeps imports fixed, effectively replacing the market mechanism entirely
0
