CHAPTER 7
ANALYSIS OF A
TARIFF
The concept of tariff


1.
2.
A tariff is a tax on importing a good service into a
country, usually collected by customs officials at
the place of entry.
Tariffs come in two main types:
A specific tariff is stipulated as a money amount
per physical unit of import.
An ad valorem (on the value) tariff is a percentage
of the estimated market value of the goods when
they reach the importing country.
2
The effect of a tariff on producers
3
The effects of a tariff on
domestic producers
Domestic producers gain when the government
imposes a tariff on competing imports. They
get a higher price for their products, they
produce and sell a larger quantity, and they
receive more producer surplus.
4
The effect of a tariff on consumers
5
The effects of a tariff on
domestic consumers
Domestic consumers must pay a higher price
(for both imported and domestically produced
products), they reduce the quantity that they
buy and consume, and they suffer a loss of
consumer surplus.
6
The tariff as government
revenue
The government also collects tariff
revenue, equal to the tariff rate per
unit imported times the quantity
that is imported with the tariff in
place.
7
The net national loss from a tariff
8
The net national loss from a tariff
Area d sometimes called the consumption
effect of the tariff. The consumption effect
of the tariff is the loss of consumer surplus
for those consumers who are squeezed
out of the market because the tariff
“artificially” raises the domestic price,
even though foreigners remain willing to
sell products to the importing country at
the lower world price. Area d is a
deadweight loss.
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The net national loss from a
tariff
Area b is called the production effect of
the tariff. The production effect of the
tariff is the loss from using high-cost
domestic production to replace lowercost imports. Area b is also a
deadweight loss. Thus, the gains from
trade lost by the tariff come in two
forms: the consumption effect of area
d plus the production effect of area b.
10
Deadweight loss
The monetary value of the loss in economic
efficiency due to a government policy (for
example, a tax, subsidy, quota, price floor, or
price ceiling) that causes market prices,
supply or demand to differ from their free
market equilibrium values.
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The deadweight loss from a
tariff



By discouraging some imports that would
have been worth more to buyers than the
price being paid to cover the foreign seller’s
costs
By shifting some production to higher-cost
domestic producers
The tariff still has its costs.
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The terms-of-trade effect and a
nationally optimal tariff
13
The terms-of-trade effect and a
nationally optimal tariff
14
The terms-of-trade effect and a
nationally optimal tariff
Optimal tariff, the tariff rate that makes
the net gain to the importing country as
large as possible. For a large country,
this optimal tariff lies between no tariff
and a prohibitively high one. The
optimal tariff rate is inversely related to
the price elasticity of foreign supply of
the country’s imports.
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The terms-of-trade effect and a
nationally optimal tariff

The lower the foreign supply elasticity, the higher
optimal tariff rate. The more inelastically foreigners
keep to supplying a nearly fixed amount to importing
country, the more importing can get away with
exploiting exporting country. Conversely, if exporting
country’s supply is infinitely elastic (the small
country case), facing importing country with a fixed
world price, then importing country cannot get
exporting country to accept lower prices. If exporting
country supply elasticity is infinite, importing
country’s tariff hurts only themselves, and the
optimal tariff is zero.
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The terms-of-trade effect and a
nationally optimal tariff
The optimal tariff causes a net loss to
the whole world. The loss to the
foreign exporting country is larger
than the net gain to the importing
country. And a country trying to
impose an optimal tariff risks
retaliation by the foreign countries
hurt by the country’s tariff.
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Questions1

Home’s demand curve for wheat is
D=100-20P
Its supply curve is
S=20+20P
Foreign’s demand curve is D*=80-20P, and a
supply curve is S*=40+20P.
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Questions1
a.
b.
①
Now allow Foreign and Home to trade with each
other, at zero transportation cost. Find and graph
the equilibrium under free trade. What is the world
price? What is the volume of trade?
Home imposes a specific tariff of 0.5 on wheat
imports.
Determine and graph the effects of the tariff on the
following: (1) the price of wheat in each country; (2)
the quantity of wheat supplied and demanded in
each country; (3) the volume of trade.
19
Questions1
② Determine the effect of the tariff on the
welfare of each of the following groups:(1)
Home import-competing producers; (2)Home
consumers; (3) the Home government.
③ Show graphically and calculate the terms of
trade gain, the efficiency loss, and the total
effect on welfare of the tariff.
20
Questions

Quantify the effects of a country’s tariff on
sugar.
21
Questions
Situation with import
tariff
Estimated situation
without tariff
$0.10per pound
$0.02per pound
$0.12per pound
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$0.10per pound
0
$0.10per pound
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Domestic production
(billions of pounds per
year)
8
6
Imports (billions of
pounds per year)
12
16
World price
Tariff
Domestic price
Domestic
consumption (billions
of pounds per year)
22
Questions
Calculate the following measures:
1. The domestic consumers’ gain from
removing the tariff.
2. The domestic producers’ loss from removing
the tariff.
3. The government tariff revenue loss.
4. The net effect on national well-being.
23
Questions

The import duty is a 5% tariff on imported
motorcycles. You are given the information
shown in the table.
24
Questions
Current situation with
5% tariff
Estimated situation
without tariff
World price
$2000per cycle
$2050per cycle
Tariff at 5％
$100per cycle
0
Domestic price
$2100per cycle
$2050per cycle
Number of cycles
purchased
domestically per year
100，000
105，000
Number of cycles
produced domestically
per year
40，000
35，000
Number of cycles
imported per year
60，000
70，000
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Questions
Calculate the following:
1. The consumer gain from removing the duty.
2. The producer loss form removing the duty.
3. The government tariff revenue loss.
4. The net effect on the country’s well-being.
Why does the net effect on the country as a
whole differ from the result in previous
question?
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