Question
Consider the figure, which represents the domestic market for a particular good. Suppose that imports are available from the rest of the world at a
Consider the figure, which represents the domestic market for a particular good. Suppose that imports are available from the rest of the world at a constant supply price, Pw (small open economy assumption). Suppose the government decided to impose an import tariff, which increases the price to Pd. Using the labeled areas above, determine:
(i) The change in consumer surplus. Note whether it is a loss or gain.
(ii) The change in producer surplus. Note whether it is a loss or gain. .
(iii) The area representing government revenue. Is it a gain or loss to taxpayers? .
(iv) The overall change in welfare. Note whether it is a loss or gain.
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