Question

 3. Welfare effects of a tariff in a small country

 Suppose Zambia is open to free trade in the world market for oranges. Because of Zambia's small size, the demand for and supply of oranges in Zambia do not affect the world price. The following graph shows the domestic oranges market in Zambia. The world price of oranges is Pw = $800 per ton.

 On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS).

 If Zambia allows international trade in the market for oranges, it will import _______  tons of oranges.

 Now suppose the Zambian government decides to impose a tariff of $50 on each imported ton of oranges. After the tariff, the price Zambian consumers pay for a ton of oranges is _______ , and Zambia will import _______  tons of oranges.

 Show the effects of the $50 tariff on the following graph.

 Use the black line (plus symbol) to indicate the world price plus the tariff. Then, use the green points (triangle symbols) to show the consumer surplus with the tariff and the purple triangle (diamond symbols) to show the producer surplus with the tariff. Lastly, use the orange quadrilateral (square symbols) to shade the area representing government revenue received from the tariff and the tan points (rectangle symbols) to shade the areas representing deadweight loss (DWL) caused by the tariff.

 Complete the following table to summarize your results from the previous two graphs.

 Based on your analysis, as a result of the tariff, Zambia's consumer surplus _______  by $_______ , producer surplus _______  by

 and the government collects _______  in revenue. Therefore, the net welfare effect is a _______ of _______ .

Answer 1

World price = $800 per ton.

If Zambia allows international trade in the market for oranges , it will import (35-15)= 20 tons of oranges.

Consumer surplus is the triangle area above the price of $800 and below the demand curve .

CS= (0.5)(1150-800)(35)= $ (0.5)(350)(35)= $ 6,125

Producer surplus is the triangle area above the supply curve and below the price of $800.

PS = (0.5)(800-650)(15)= (0.5)(150)(15)= $ 1125

These areas are shown in the below figure:

Now, suppose the government decides to impose a tariff of $50 on each imported ton of oranges . After the tariff ,the price Zambian consumers pay for a ton of oranges is $(800+50)= $850 per ton and Zambia will import (30-20)= 10 tons of oranges.

Consumer surplus with tariff is the triangle area above the price of $850 and below the demand curve .CS with tariff = (0.5)(1150-850)(30)= (0.5)(300)(30)= $ 4500

Producer surplus with tariff is the triangle area above the supply curve and below the price of $850.

PS with tariff = (0.5)(850-650)(20)= (0.5)(200)(20)= $2000

Government revenue is the rectangle area = (850-800)(30-20)= $500

These areas are shown in the below figure :

	Under free trade (Dollars)	Under Tariff (Dollars)
Consumer surplus	6125	4500
Producer surplus	1125	2000
Government revenue	0	500

As a result of the tariff ,Zambia's consumer surplus decreases by (6125-4500) = $1625 , producer surplus increases by (2000-1125)= $875 and the government collects $500 in revenue. Therefore, the net welfare effect is a decrease of (1625-875-500)= $ 250.