Question

Suppose Guatemala is open to free trade in the world market for maize. Because of Guatemala’s small size, the demand for and supply of maize in Guatemala do not affect the world price. The following graph shows the domestic maize market in Guatemala. The world price of maize is PWPW = $350 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).

Show the effects of the $60 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.

Answer 1

Import = 120-30 = 90 tons

After tariff of 60, price = 350+60=410 and imports = 90-60 = 30 tons

	Under free trade	Under a tariff
CS	0.5*120*(590-350) = 14400	0.5*90*(590-410) = 8100
PS	0.5*30*(350-290) = 900	0.5*60*(410-290) = 3600
GR	0	30*60 = 1800

CS decreases by 14400-8100 = 6300

PS increases by 3600-900 = 2700

GR = 1800

Net welfare effect is a loss of 6300-2700-1800 = 1800