Answer to Question #292143 in Microeconomics for Dilisha

Question

Suppose that Congress imposes a tariff on import autos to protect the US in auto industries from foreign competition assuming that the United State is a price taker in the world auto Market show the following on a diagram the change in the quantity of imports the lost to us consumers the game to us manufactures government revenue and the diet weight loss associated with the tariff the loss to consumer can be decomposed into three pieces again to domestic producers revenue for the Government and that weight loss use your diagram to identify these three piece

Answer 1

When a tariff is imposed, the domestic price of imported goods rises above the world price.

A tariff on imports protects domestic producers of similar goods, while domestic consumers are among the losers, as they are further taxed through higher prices.

Under free trade, domestic prices of goods (Pd) will be close to world prices (Pw) and the excess demand over supply is covered by imports.

As a result of the tariff, imports are reduced to Q'sQ'd While domestic production of goods increases from Qs to Qs', and domestic consumption decreases from Qd to Qd'. Domestic production expands because domestic producers do not pay the tariff and can therefore produce their goods at a higher marginal cost than the world market. A tariff on imports can thus protect low-performing domestic industries from foreign competition. At the same time, domestic consumers generally reduce their purchases because of higher prices for both domestic and imported goods. The net consumer losses from the introduction of the tariff form the area (a + b + c + d), which characterizes the reduction in the amount of consumer surplus.

Part of the increased consumer payments now go to domestic producers in the form of increased sales profits (area a). Domestic firms in import-substituting industries now sell their initial output Qs at increased prices and earn additional profits from the increase in output to Q's and the sale of this output at a tariffed price. In this case there is a redistribution of consumer income in favor of producers, although certain groups of consumers who own shares of firms in import-substituting industries may receive increased profits from the introduction of the tariff.

The producers' gains from the introduction of the tariff on imports do not cover the losses of domestic consumers. The latter turn out to be the more significant, the stronger is the general impulse to increase the level of prices and inflation, set by the introduction of trade restrictions.

The net loss of national welfare is represented by areas b and d. Area b represents the production effect of the tariff - a reduction in welfare due to a shift in consumer demand from cheaper imported products to more expensive domestic products. Increased consumer payments stimulate the expansion of inefficient domestic production with high marginal costs, while in the absence of tariff protection labor and capital resources could have been used more efficiently in other sectors of the economy.

Area d represents the consumer effect of the tariff - a reduction in welfare due to involuntary reductions in consumption. Consumers would be willing to pay a price between Pw and Pd for an additional quantity of goods in order to satisfy their demand without reducing it. However, the tariff does not allow this, and so domestic consumption declines.

Society's net loss does not turn out to be anyone's gain and is therefore absolute.