Question

Explain the effect of a tariff on consumer surplus and producer surplus.

Answer 1

A tariff causes consumer surplus to decrease due to higher prices and leads to a reduced quantity of goods purchased. Producer surplus increases as domestic producers can sell at higher prices and in greater quantities. The overall effect is a redistribution of welfare from consumers to producers.

Step-by-step explanation:

The effect of a tariff on consumer surplus and producer surplus involves a shift in costs and benefits between consumers and producers. When a tariff is imposed, consumer surplus typically decreases because consumers face higher prices and thus curtail their consumption. This is represented by the consumer surplus shrinking to a smaller triangle after trade barriers are enacted. On the other hand, producer surplus tends to increase as local producers can sell their goods at higher prices and in larger quantities, indicated by the expansion of the producer surplus area in a supply and demand model.

For example, if the U.S. imposes tariffs on imported sugar from Brazil, U.S. consumers would end up paying a higher price for sugar (PNoTrade), reducing their consumer surplus to the area of the triangle PNoTrade, E, and B. Meanwhile, U.S. producers would benefit as they would sell more sugar domestically at the higher price, thereby increasing their producer surplus to the area of the triangle PNoTrade, E, and D.

Answer 2

The increase in the domestic price of both imported goods and the domestic substitutes reduces the amount of consumer surplus in the market. Tariff effects on the importing country's producers. ... The increase in the price of their product on the domestic market increases producer surplus in the industry.