Tariffs on Imports: Study with Video Lessons, Practice Problems & Examples

Tariffs, taxes on imported goods, impact international trade by raising prices, which reduces consumer surplus and increases producer surplus. The government gains revenue from these tariffs, but they also create deadweight loss by impeding trades. The deadweight loss occurs in sections D and F, illustrating the inefficiencies introduced by tariffs. Governments may impose revenue tariffs for income or protective tariffs to shield domestic industries from foreign competition. Understanding these dynamics is crucial for analyzing the effects of trade policies on the economy.

Tariffs on Imports

Alright, so now let's bring in taxes into the whole mix of international trade and see what happens. So when we add taxes into this situation, what we're going to be doing is adding tariffs on imports, right? When we talk about taxes in an international trade situation, we're going to be talking about tariffs which is just a tax on imported goods. Right? So if there is some other country wants to import something to our country, they're gonna have to pay a tax to import it here. Okay? So what we're gonna see is that these tariffs are gonna impede on free trade, right? They're gonna add this layer, that's gonna impede on free trade, but on the positive side, it's gonna provide some tax revenue to the government, right? That's why it's kind of done is to provide this tax revenue. So the suppliers domestically don't want to fill the demand that the consumers have at this low price, right? So we're gonna be importing goods from overseas to fill that demand and that's what we saw in the previous video, right? So we've got our domestic supply, our domestic demand. I'm gonna scroll down just to have this space and we're gonna see that we had this world price here, right? This was the low world price that leads us to have imports, right? So before we get to the tariff, let's just remind ourselves of the situation when we have a low world price, right? We're gonna have this right here where it touches the supply curve. This would have been the domestic quantity supplied when we have a low world price, right? So we haven't even brought in the tariff yet and here would have been the quantity demanded domestically, right? We have this large gap, a lot more quantity demanded than quantity supplied, right? And we saw that we had this large amount was going to be imported, right? This was the imports, I'm gonna say before tariff. Okay? So we had this large amount of import before the tariff and now we're gonna add the tariff into the situation. So what's gonna happen? If someone wants to import something into our country, what's gonna happen is that there's gonna be this world price, right, the price that's gonna be sold plus the tariff, right. So what's it gonna do? It's gonna increase it by that amount there right? So this amount between these two curves, that is the amount of the tariff, right? That is the amount of the tariff between there. So what's gonna happen here to our quantity supplied and our quantity demanded? So now domestically in our country, there's this higher price, right? There's not this world price anymore, there's this bit higher price and this allows our domestic suppliers to supply a little more than they were before, right? So they had this quantity supplied before, but now at this higher price, they're willing to supply a little bit more right. So our domestic suppliers don't have to pay the tax, there's no tax to them, right? What they have is a higher price making them more competitive with the foreign suppliers. So this new quantity supplied, I'm gonna put QS and I'm gonna put a T next to it because this is this quantity supplied with the tariff. Okay? So quantity supplied with the tariff and the quantity demanded with the tariff is gonna be over here. Right? We've got the quantity demanded with the tariffs. So what has it done? It's brought them a little closer together, right? It's reduced the amount of imports so in this case, the imports is gonna just be this distance between these two, right? The new imports is gonna be this smaller amount. Imports with tariff. Right? So we've got a smaller amount of imports because the domestic suppliers are now willing to supply some and the quantity demanded has also decreased, right? So we're gonna have fewer imports here and now let's go ahead and see what happens to our consumer surplus, producer surplus, government revenue. Let's see what happens with all of this stuff here. So I'm gonna go ahead and label the graph here. The sections we've got A, we have B, C, this little triangle will be D, E, F, and then we'll have G over here. Cool? So we've got a lot of little sections here. Let's go ahead and see what is what. So first, let's talk about before the tariff, right? Before we added the tariff, we saw what happened. We're gonna have this big surplus, right, for the consumers and the small surplus for the producers, Right? So before the tariff, everything above the price which was the world price but below the demand curve. So we see this huge area here. This was all consumer surplus, right? So we see consumer surplus was A plus B plus C plus D plus E plus F. Right? They have all those sections were part of the consumer surplus. Now again I hope you're not shading it in yet because we're gonna erase and reshade once we get to the after tariff, right? We've already seen this graph previously when we just talked about imports. So now what we wanna focus on is what's gonna happen once we add the tariff. So we see that this little section G is gonna be our producer surplus, right? Everything below the price but above the supply curve. So G is gonna be our producer surplus and we see our total surplus is A, B, C. It's everything right? Plus D, plus E, plus F, plus G. Everything is surplus there. There's no tax before we add the tariff, right? There was no tax, so there's no government revenue and there's no deadweight loss. Alright, so you see that we're going to talk about deadweight loss here, right? Every time we add a tax, there's going to be deadweight loss. The tax is going to impede on all the trades that wanted to be made, it's going to stop some of those trades so we're going to have deadweight loss. So let's go ahead and see where that deadweight loss is going to be. I'm gonna erase this and let's go ahead and relabel these sections, right? So let's start here with our Consumer Surplus. Our consumer surplus, everything above the price but below the demand curve, so we're gonna see that the new price, right, is this amount with the tariff and we're gonna see that the consumer surplus has gotten a little smaller. Right? Now it's just this section a plus b. So they're making less trades. There's less consumer surplus, right? Because the quantity demanded went down, the price went up, they've...

If a nation imposes a tariff on an imported good, it will increase

• A. The domestic quantity demanded
• B. The domestic quantity supplied
• C. The quantity imported from abroad
• D. All of the above

A tariff on imports benefits domestic producers because

• A. They receive the tariff revenue
• B. It prevents imports from rising above a specified quantity
• C. It reduces their producer surplus, making them more efficient
• D. It raises the price for which they can sell their products in the domestic market
• E. All of the above

Here’s what students ask on this topic:

What are tariffs and how do they affect international trade?

Tariffs are taxes imposed on imported goods. They affect international trade by increasing the price of imported goods, which reduces consumer surplus (the benefit consumers receive from purchasing goods at lower prices) and increases producer surplus (the benefit domestic producers receive from selling goods at higher prices). The government gains revenue from these tariffs, but they also create deadweight loss by impeding trades that would have occurred without the tariff. This inefficiency is represented by the areas D and F in economic graphs, illustrating the lost economic welfare due to the tariff.

What is the difference between a revenue tariff and a protective tariff?

A revenue tariff is imposed primarily to generate income for the government. It taxes imports to raise funds without necessarily aiming to protect domestic industries. On the other hand, a protective tariff is designed to shield domestic industries from foreign competition. By raising the price of imported goods, protective tariffs make domestic products more competitive, thereby supporting local producers and potentially preserving jobs within the country. Both types of tariffs impact consumer and producer surplus, government revenue, and create deadweight loss.

How do tariffs impact consumer and producer surplus?

Tariffs impact consumer and producer surplus by altering the prices of goods. When a tariff is imposed, the price of imported goods increases. This leads to a decrease in consumer surplus because consumers now pay higher prices and purchase fewer goods. Conversely, producer surplus increases because domestic producers can sell their goods at higher prices and potentially increase their market share. However, the overall economic welfare is reduced due to the creation of deadweight loss, which represents the trades that no longer occur because of the higher prices caused by the tariff.

What is deadweight loss and how is it related to tariffs?

Deadweight loss refers to the loss of economic efficiency that occurs when the equilibrium outcome is not achieved. In the context of tariffs, deadweight loss arises because the tariff increases the price of imported goods, leading to a reduction in the quantity of goods traded. This results in fewer mutually beneficial transactions between consumers and producers. The areas D and F in economic graphs represent this deadweight loss, illustrating the lost consumer and producer surplus that occurs due to the tariff. Essentially, deadweight loss signifies the economic value that is lost to society because of the tariff.

Why do governments impose tariffs despite the deadweight loss they create?

Governments impose tariffs for several reasons despite the deadweight loss they create. One primary reason is to generate revenue, known as a revenue tariff. This helps fund government activities and services. Another reason is to protect domestic industries from foreign competition, known as a protective tariff. By making imported goods more expensive, protective tariffs help domestic producers compete more effectively, potentially preserving jobs and industries within the country. While tariffs do create inefficiencies and deadweight loss, the government may consider these trade-offs acceptable for the benefits of revenue generation and industry protection.