University Effect of a Tariff for a Small Country (1) . Consider a small country: small enough not to affect the world price level. . Applying a tariff of t per unit of imports increases the import price from PW to PW + t. The domestic price also rises to PW + t. This increases domestic quantity supplied from S1 to S2; and decreases quantity demanded from D1 to D2. (a) Home Market (b) Import Market Price Price No-trade equilibrium n p +t ..... X* + t . . B PW Foreign export supply, X* . . . . . . . . . . . . M S1 S2 D2 D, Quantity M2 Imports ECON847 INTERNATIONA M2 15Effect of a Tariff for a Small Country (3) - The tariff decreases C5 by (a + b + c + d), and increases PS by (a). - The government collects the tariff revenue (c). The net welfare effect of a tariff is (b + d). The tariff creates deadweig ht loss. - Note that this statement is based on one-dollar, one-vote metric: Every dollar of gain or loss isjust as important as every other dollar of gain or loss, regardless ofwho the gainers or losers are. (a) Home Market (b) Import Market Price Price Deadweight loss due to the tariff b + d ECON847 INTERNATIONAL TRADE S1 S2 l)2 l)1 Quantity M2 M1 Imports 17