David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

28.4 The economics of tariffs
SS
Q)
"
.i::
A.
£12 000
L
World price
plus tariff
£10 000 J World price
1
: -. : +--
I
I
Qs Q' s Q Qd
Quantity
The tariff leads to both transfers and to net social losses. The tariff raises the domestic price from £10 000
to £12 000. LFHJ shows extra consumer payments of the Q cars they now buy. But EFHI is a transfer to the
government and ECJL is a transfer to extra profits of producers. Areas A and B are pure waste and net social
losses. Triangle A is the extra that society spends by producing cars domestically instead of importing them at
the world price. Triangle Bis the excess of consumer benefits over social marginal cost that society sacrifices
by reducing its consumption of cars from Qd to Q.
I
Figure 28.4
The welfare costs of a tariff
By raising domestic car prices, the tariff boosts domestic car production from Qs to Q/. The tariff protects
domestic producers by raising the domestic price at which imports become competitive. In moving up the
supply curve from C to E, domestic producers with marginal costs between £10 000 and £12 000 can now
survive at the higher domestic price of cars.
The higher price also moves consumers up their demand curve from G to F. The quantity of cars demanded
falls from Qd to Q;. For consumers, the tariff is like a tax. Cars cost more.
Figure 28.3 shows the combined effect of higher domestic production but lower domestic consumption.
Imports fall because domestic production rises and because domestic consumption falls. The more elastic
are these supply and demand schedules, the more a given tariff reduces imports. If both schedules are very
steep, the quantity of imports hardly changes.
Costs and benefits of a tariff
Figure 28.4 shows the costs and benefits of imposing a tariff. We distinguish net costs to society from
transfers between one part of the economy and another.
After the tariff is imposed, consumers buy the quantity Q;. Since the consumer price rises by £2000,
consumers spend (£2000 x Q;) more than before to buy the quantity Q;. Who gets these extra payments
- the area LFHJ in Figure 28.4?
Some of the extra consumer payments go to the government, whose revenue from the tariff is the rectangle
EFHI, the tariff of £2000 per imported car times ( Qd- Q;) the number of imported cars. This transfer EFHI
from consumers to government is not a net cost to society. For example, the government can use the tariff
revenue to reduce income tax rates.
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