Principles of Microeconomics / Unit 16 MIC 1513 worked example, 60 to 90 seconds
A Tariff's Geometry
The idea
Take an importing country too small to move the world price. Under free trade it consumes where demand meets the world price and produces where supply meets it; the gap is imports. A tariff lifts the domestic price by its amount: consumption falls, production rises, imports shrink. Measure four areas between the two prices: consumers lose a trapezoid; producers gain a smaller one; the government collects the tariff times the new imports; the remainder is two deadweight triangles, costlier production and lost consumption.
In practice
Worked example: Home faces a world price of six hundred, consumes one hundred tons, makes sixty and imports forty. A one-hundred-dollar tariff raises the price to seven hundred: consumption ninety, production seventy, imports twenty. Consumer surplus falls by one hundred times the average of one hundred and ninety, nine thousand five hundred. Producer surplus rises by one hundred times the average of sixty and seventy, six thousand five hundred. Revenue is one hundred times twenty, two thousand. The remainder, one thousand, is the deadweight loss: half of one hundred times ten on the production side and the same on the consumption side.
Where people slip
The triangles are unit four's tax deadweight loss split by the domestic supply curve; the rectangle is the wedge on imported units only. And consumers lose more than producers and government gain together; the anchor leaves that loss undrawn.
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