Question

What happens to CS, PS and GR when a tariff is instituted?

Answer 1

When a tariff is set, consumer surplus decreases as consumers face higher prices and buy less, producer surplus may increase or remain unchanged, and government revenue increases from the tariff imposed.

Step-by-step explanation:

When a tariff is instituted, it impacts consumer surplus (CS), producer surplus (PS), and government revenue (GR) as part of economic trade effects. Generally, a tariff is a tax on imports, making imported goods more expensive and thus affecting the supply curve. In the case of imposing a tariff, we can follow this four-step analysis:

1. Draw the graph with the initial supply and demand curves. Label the initial equilibrium price and quantity before the tariff.
2. Identify the effect of the tariff, which acts like a cost of production, leading to a decrease in supply.
3. Illustrate the tariff as a leftward (or upward) shift in the supply curve.
4. As the supply curve shifts leftwards, it causes a movement up the demand curve, increasing the equilibrium price and decreasing the equilibrium quantity.

This results in a decrease in consumer surplus, as consumers pay higher prices and purchase less. Producer surplus may either increase or stay unchanged based on domestic producers' ability to fill the gap left by reduced imports. Government revenue increases due to the tariff imposed on imported goods.