6. Effects of a tariff in a large nation The following graph shows the domestic market for oil in the United States, where SD is the domestic supply curve, and DD is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of oil. Under free trade, the United States faced a total supply schedule of S.w, which shows the quantity of oil that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $400 per barrel of oil and a quantity of 18 million barrels. At this price, the United States imports 12 million barrels of oil. Suppose the U.S. government imposes a $100-per-barrel tariff on oil imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff { So.w.T). Then use the grey point (star symbeol) to indicate the new market equilibrium price and quantity as a result of the tariff. 700 650 500 SD+W+T E 550 '? 8 - . 500 Equilibrium Under Tariff g a0 g o e o e et T - Domestic Revenue Effect o as0 H 300 Terms-of-Trade Effect 250 i 200 o 2 4 & B 10 12 14 16 18 0 Deadweight Loss QUANTITY OF OIL (Millions of barrels) The tarrif's revenue effect (the import tariff multiplied by the quantity of oil imported) can be broken into two components: + Domestic revenue effect + Terms-of-trade effect On the previous graph, use the green rectangle (triangle symbols) to indicate the domestic revenue effect of the tariff. Then use the purple rectangle (diamond symbols) to indicate the terms-of-trade effect. Now consider the effect of the tariff on welfare in the United States. On the previous graph, use the black triangles (plus symbols) to indicate the deadweight loss caused by the tariff. True or False: National welfare in the United States decreases as a result of a $100-per-barrel tariff on oil imports. O True O False