Tariffs on Imports - Online Tutor, Practice Problems & Exam Prep

Tariffs, taxes on imported goods, impact international trade by increasing prices, which reduces consumer surplus and enhances producer surplus. The government gains revenue from tariffs, represented by the area between the world price and the price plus tariff. However, tariffs also create deadweight loss, which occurs when trades that would have happened are impeded. Understanding the balance between revenue tariffs, aimed at generating income, and protective tariffs, designed to shield domestic producers from foreign competition, is crucial for analyzing market dynamics and economic efficiency.

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 do is add tariffs on imports, right? When we talk about taxes in an international trade situation, we're going to discuss tariffs, which is just a tax on imported goods. So if some other country wants to import something to our country, they're going to have to pay a tax to import it here. Okay? So, we're going to see that these tariffs are going to impede free trade, right? They're going to add this layer that's going to impede free trade, but on the positive side, it's going to provide some tax revenue to the government, right? That's why it's kind of done — to provide this tax revenue. So the domestic suppliers don't want to fulfill the demand that consumers have at this low price, right? So we're going to be importing goods from overseas to fill that demand, and that's what we saw in the previous video, right? We've got our domestic supply, our domestic demand. I'm going to scroll down just to have this space, and we're going to see that we had this low 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 remind ourselves of the situation when we have a low world price. We're going to have this right here where it touches the supply curve. This would have been the domestic quantity supplied when we have the low world price, right? 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 big amount to be imported, right? This was the imports — Let's say, before tariffs, okay? So we had this big amount of import before the tariff, and now we're going to add the tariff into the situation. So what's going to happen? If someone wants to import something into our country, what's going to happen is that there's going to be this world price, right, the price that's going to be sold plus the tariff, right. So what it's going to do? It's going to effectively increase the price to our consumers, right? Even though the world price in other countries is still the world price, this tariff only exists in our country. So what we're going to see is we're going to have the world price plus the tariff, right? I'm going to put that here: world price plus tariff. It's going to increase it by that amount there, right? So this amount between these two curves, that is the amount of the tariff, right?

So what's going to happen here to our quantity supplied and our quantity demanded? 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. 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 going to put Qs and I'm going to put a t next to it because this is the quantity supplied with the tariff, okay? So quantity supplied with the tariff, and the quantity demanded with the tariff is going to 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 are going to just be this distance between these two, right? The new imports are going to 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 going to 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 going to 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 going to 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 where part of the consumer surplus.

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 is a tariff and how does it affect international trade?

A tariff is a tax imposed on imported goods. It affects international trade by increasing the price of imported goods, making them less competitive compared to domestic products. This leads to a reduction in consumer surplus, as consumers pay higher prices and buy fewer imported goods. On the other hand, producer surplus increases because domestic producers can sell more at higher prices. The government also gains revenue from the tariff, which is the product of the tariff rate and the quantity of imports. However, tariffs create deadweight loss, representing the trades that do not occur due to the higher prices, leading to a loss in overall economic efficiency.

How do tariffs impact consumer and producer surplus?

Tariffs impact consumer and producer surplus by altering the market dynamics. When a tariff is imposed, the price of imported goods increases. This higher price reduces consumer surplus, which is the difference between what consumers are willing to pay and what they actually pay. Consumers end up paying more and buying less, thus losing surplus. Conversely, producer surplus increases because domestic producers can now sell more at the higher price, which makes them more competitive against foreign producers. The overall effect is a redistribution of surplus from consumers to producers, along with some government revenue and deadweight loss.

What is deadweight loss in the context of tariffs?

Deadweight loss in the context of tariffs refers to the loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved due to the imposition of a tariff. This loss represents the trades that would have occurred in a free market but are impeded by the higher prices resulting from the tariff. In a supply and demand graph, deadweight loss is typically illustrated as the area between the supply and demand curves that is not realized due to the tariff. It signifies the reduction in total surplus, which includes both consumer and producer surplus, and is a key argument against the use of tariffs.

What are the differences between revenue tariffs and protective tariffs?

Revenue tariffs and protective tariffs serve different purposes. Revenue tariffs are primarily designed to generate income for the government. They are imposed on imports to collect tax revenue without necessarily aiming to protect domestic industries. Protective tariffs, on the other hand, are intended to shield domestic producers from foreign competition. By raising the price of imported goods, protective tariffs make domestic products more competitive, thereby supporting local industries and potentially preserving jobs. While both types of tariffs increase government revenue, protective tariffs are more focused on altering market dynamics to favor domestic production.

How do tariffs create government revenue?

Tariffs create government revenue by imposing a tax on imported goods. The revenue generated from tariffs is calculated as the product of the tariff rate and the quantity of imports. For example, if a country imposes a tariff of $10 on each imported unit and imports 1,000 units, the government revenue from the tariff would be $10,000. This revenue is collected by the government and can be used to fund public services and infrastructure. However, while tariffs provide a source of income, they also lead to higher prices for consumers and can create deadweight loss, reducing overall economic efficiency.