QUANTITATIVE ECONOMICS

7. Calculate the fall in consumer surplus resulting from the imposition of the tariff.
The consumer surplus will fall by a total of the areas A+B+C+D+E.
A+B+C+D = 2 million x 50c = $1 million. E = ½ x 500,000 x 50c = $125,000.
So, the total loss of consumer surplus is $1,125,000.
8. Calculate the dead-weight losses suffered as a result of imposing the tariff.
The dead-weight losses are represented by areas B and E.
Area B is the extra cost to “the world” of the output that is now produced by inefficient
domestic producers, instead of efficient foreign producers = ½ x 500,000 x 50c =
$125,000.
Area E is the loss of consumer surplus from products that are no longer consumed
and was calculated above to also be $125,000.
Calculating from diagrams the effects of setting a quota on foreign producers on
different stakeholders, including domestic producers, foreign producers, consumers
and the government.
Once a diagram has been given or drawn, you may be asked to include world supply curves
and quotas and to calculate different effects of the quota.
E.g. Using the diagram on page 56:
1. Add the world supply curve if foreign producers are prepared to supply cooking oil at
$0.50. Then show the effect on the diagram of the government imposing a quota on
imports of 1 million units.
This is simple. Domestic producers supply 500,000 units and then the foreign
producers are now allowed to supply 1 million more and no more. So, the domestic
supply curve above 50c and an output of 500,000 litres, shifts to the right.
The price now rises to $1 and total quantity demanded and supplied falls to 2 million
litres.
2. Identify the level of domestic production before the quota and after.
Before the quota, domestic production is where the domestic supply curve meets the
world supply curve, i.e. 500,000 litres.
After the quota, domestic production is the supply at $1, which is now the market
price, which is 1 million litres.
Produced by Ian Dorton & Jocelyn Blink Page 58