Canada produces steel domestically and also imports it from abroad. Assume that the world market for steel

Question:

Canada produces steel domestically and also imports it from abroad. Assume that the world market for steel is competitive and that Canada is a small producer, unable to affect the world price. Since Canada imports steel, we know that in the absence of trade, the Canadian equilibrium price would exceed the world price.
a. Draw a diagram showing the Canadian market for steel, with imports at the world price.
b. Explain why the imposition of a tariff on imported steel will increase the price of steel in Canada.
c. Who benefits and who is harmed by such a tariff? Show these effects in your diagram.

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a See the figure below The demand and supply curves are for Canadian consumers and Canadian producers respectively The world price p w is shown below the price that would exist in Canada if Canada were a closed economy p c Canada produces Q 1 units of steel and consumes Q 2 units of steel importing the difference from abroad b We assume here that we are talking about one particular grade of steel so that the foreign steel is identical to the domestic steel With a tariff of t dollars per unit on imported steel the price in Canada of imported steel will now be p w t But the law of one price says that identical products will sell for the same price so the price of domestic steel will also rise by t dollars per unit the price in the rest of the world will not be affected by the Canadian tariff since Canada is a small country The Canadian price rises to p w t The quantity supplied domestically rises to Q 3 while the quantity demanded domestically falls to Q 4 Imports therefore fall from Q 1 Q 2 to Q 3 Q 4 c Domestic consumers clearly lose since they consume less steel and pay a higher price per unit The loss of consumer surplus is shown by areas 1 plus 2 plus 3 plus 4 Canadian steel producers and their workers gain from the tariff since it raises the price and allows them to increase sales The gain in producer ...View the full answer

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