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7 . Welfare effects of a tariff in a small country Suppose New Zealand is open to free trade in the world market for wheat.
7 . Welfare effects of a tariff in a small country Suppose New Zealand is open to free trade in the world market for wheat. Because of New Zealand's small size, the demand for and supply of wheat in New Zealand do not affect the world price. The following graph shows the domestic wheat market in New Zealand. The world price of wheat is Pw = $250 per tonne. 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).490 Domestic Demand Domestic Supply 460 CS 430 400 370 PS 340 PRICE (Dollars per tonne) 310 280 250 220 190 0 20 40 60 80 100 120 140 160 180 200 QUANTITY (Tonnes of wheat)1f New Zealand allows international trade in the market for wheat, it will import \\:| tonnes of wheat. Now suppose the New Zealand government decides to impose a tariff of $60 on each imported tonne of wheat. After the tariff, the price New Zealand consumers pay for a tonne of wheat is , and New Zealand will importEtonnes of wheat. 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. Wren, use the green triangle ( 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 tariflc and the tan triangles (dash symbols) to shade the areas representing deadweight loss (DWL) caused by the tariff. 490 Domestic Demand Domestic Supply 460 World Price Plus Tariff 430 400 CS 370 340 PRICE (Dollars per tonne) PS 310 280 PW 250 Government Revenue 220 190 DWL 20 40 60 80 100 120 140 160 180 200 QUANTITY (Tonnes of wheat)Complete the following table to summarize your results from the previous two graphs. Under Free Trade Under 3 Tariff (Dollars) (Dollars) Consumer Surplus Producer Surplus I ' ' I Government Revenue 0 : Based on your analysis, as a result of the ta riff, New Zealand's consumer surplus V by , producer surplus V by , and the government collects in revenue. Therefore, the net welfare effect is a V of decreases increases IS by producer surplus in revenue. Therefore, the net welfare effect is a ofConsumer Surplus Producer Surplus decreases hit Revenue O increases r analysis, as a result of the tariff, New Zealand's consumer surplus by $ and the government collects
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