Effects of a tariff in a large nation

The following graph shows the domestic market for steel in the United States, whereSDis the domestic supply curve, and DDis 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 steel. Under free trade, the United States faced a total supply schedule ofSD+W, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $240 per ton of steel and a quantity of 9 million tons. At this price, the United States imports 6 million tons of steel.

Suppose the U.S. government imposes a $60-per-ton tariff on steel imports.

7. Effects of a tariff in a large nation The following graph shows the domestic market for steel in the United States, where Sp 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 steel. Under free trade, the United States faced a total supply schedule of Spew, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $240 per ton of steel and a quantity of 9 million tons. At this price, the United States imports 6 million tons of steel. Suppose the U.S. government imposes a $60-per-ton tariff on steel imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (SD,WIT). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff. (? 420 390 DO 380 SD+W+T 330 300 Equilibrium Under Tariff 270 PRICE (Dollars per ton) 240 Domestic Revenue Effect 210 180 Terms-of-Trade Effect 150 SO+W 120 2 3 5 7 9 10 Deadweight Loss QUANTITY OF STEEL (Millions of tons) The270 PRICE (Dollars p 240 Domestic Revenue Effect 210 180 Terms-of-Trade Effect 150 SO+W 120 2 3 4 7 9 10 Deadweight Loss QUANTITY OF STEEL (Millions of tons) The tarrif's revenue effect (the import tariff multiplied by the quantity of steel 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 increases as a result of a $60-per-ton tariff on steel imports. O True O False Grade It Now Save & Continue Continue without saving