Question

America manufactures 90 million tons of steel annually but domestic demand is 120 million tons. The global market price (world price) for steel is $500/ton, at which America imports the 30 million tons it does not produce domestically. Domestic demand is not constrained by domestic supply as a result. If America imposes a 25% tariff on imports (price rises to $625/ton), domestic production rises to 100 million tons while the quantity demanded falls to 112 million tons. Calculate the change in surplus for:

a) consumers
b) domestic producers
c) the government
d) Calculate the deadweight loss to society resulting from the tariff

Answer 1

The change in surplus for consumers, domestic producers, and the government can be calculated by comparing the surplus before and after the tariff. The deadweight loss resulting from the tariff can be calculated by comparing the total surplus before and after the tariff.

Step-by-step explanation:

The change in surplus for consumers can be calculated by comparing the consumer surplus before and after the tariff. Before the tariff, the consumer surplus is the area above the world price and below the demand curve, which is equal to (120-112) * ($500-($500 * 0.25))/2. After the tariff, the consumer surplus is the area above the world price and below the new demand curve, which is equal to (120-112) * ($500-($500 * 0.25))/2 minus the area above the new price and below the demand curve, which is equal to (112-100) * ($500-($500 * 0.25))/2. Subtracting the second result from the first gives us the change in consumer surplus.

The change in surplus for domestic producers can be calculated by comparing the producer surplus before and after the tariff. Before the tariff, the producer surplus is the area below the world price and above the domestic supply curve, which is equal to (90-100) * ($500-($500 * 0.25))/2. After the tariff, the producer surplus is the area below the new price and above the domestic supply curve, which is equal to (100-90) * ($500-($500 * 0.25))/2. Subtracting the second result from the first gives us the change in producer surplus.

The change in surplus for the government is equal to the tariff revenue received. The tariff revenue is the tariff rate multiplied by the total quantity imported, which is equal to 0.25 * 30 million * $500.

The deadweight loss resulting from the tariff can be calculated by comparing the total surplus before and after the tariff. Before the tariff, the total surplus is the sum of consumer surplus, producer surplus, and government revenue. After the tariff, the total surplus is the sum of consumer surplus, producer surplus, government revenue, and the deadweight loss. The deadweight loss is the difference between the total surplus before and after the tariff.