Effects of a tariff in a small nation
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 isPw=$250per ton. Throughout this problem, assume that changes in trade policies in other nations do not significantly affect the world market for wheat and that there are no transportation or transaction costs associated with international trade in wheat. Also assume that domestic supplies will satisfy domestic demand as much as possible before any exporting or importing takes place.
6. Effects of a tariff in a small nation 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 ton. Throughout this problem, assume that changes in trade policies in other nations do not significantly affect the world market for wheat and that there are no transportation or transaction costs associated with international trade in wheat. Also assume that domestic supplies will satisfy domestic demand as much as possible before any exporting or importing takes place. 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 domestic producer surplus (PS). A-Z (?) 460 Domestic Demand Domestic Supply 430 CS 400 370 340 PS PRICE (Dollars per ton) 310 280 250 220 180 160 5 10 15 20 25 30 35 40 45 50 QUANTITY (Thousands of tons of wheat) If New Zealand allows international trade in the market for wheat, it will import tons of wheat. (Note: Be sure to enter the full value for your answer, accounting for the horizontal axis units.)If New Zealand allows international trade in the market for wheat, it will import tons of wheat. (Note: Be sure to enter the full value for your answer, accounting for the horizontal axis units.) Now suppose the New Zealand government decides to impose a tariff of $30 on each imported ton of wheat. After the tariff, the domestic price of a ton of wheat will be $ , and New Zealand will import tons of wheat. Show the effects of the $30 tariff on the following graph. Use the grey line (star symbol) to indicate the world price plus the tariff. Then, use the green triangle (triangle symbols) to show the consumer surplus with the tariff and the purple triangle (diamond symbols) to show the domestic producer surplus with the tariff. Lastly, use the orange quadrilateral (square symbols) to shade the area representing government revenue received from the tariff and the tan triangles (dash symbols) to shade the areas representing the net loss or deadweight loss (DWL) caused by the tariff. 480 Domestic Demand Domestic Supply 430 World Price Plus Tariff 400 370 340 CS PRICE (Dollars per ton) 310 280 PS PIN 250 220 Government Revenue 190 180 10 15 20 30 35 40 45 50 OWL QUANTITY (Thousands of tons of wheat)480 Domestic Demand Domestic Supply 430 World Price Plus Tariff 400 370 340 CS 310 PRICE (Dollars per ton) 280 PS PW 250 220 Government Revenue 190 180 5 10 15 20 25 30 35 40 45 50 DWL QUANTITY (Thousands of tons of wheat) Complete the following table to summarize your results from the previous two graphs. Under Free Trade Under a Tariff (Dollars) (Dollars) Consumer surplus Producer surplus Government revenue Based on your analysis, as a result of the tariff, New Zealand's consumer surplus by $ , and producer surplus by $ . Taking into account how much revenue the tariff generates for the government, the net welfare effect is a of $ Grade It Now Save & Continue Continue without saving
