Importing Country

Imports

• At the world price of $7 the domestic demand is

  90

  ---

  units and domestic supply is

  20

  ---

  units.
• The imports are equal to the excess

  demand

  ---

• In the diagram above, the imports =

  90 - 20 = 70

  ---

  units.
• With trade, the consumer surplus is everything above the price but below the demand until the quantity of 90 since that is the quantity consumers are getting in total. This is the triangle A + B + D.
• With trade, producer surplus is everything below the price but above the supply until a quantity of 20 because that's all the domestic producers are selling. This is the triangle C.

Imports with Tariff

• In the diagram above, the world price was $7 with free trade and then the government put a $2 tariff that raises the price to $9.
• With a tariff, the quantity demanded is

  80

  ---

  units and the domestic supply is

  30

  ---

  units so the imports are

  80 - 30 = 50

  ---

  units.
• The consumer surplus is everything above the price of $9 but below the demand until a quantity of 80 (since that is the quantity consumers are getting in total) which is the triangle A + B.
• The producer surplus is everything below the price of $9 but above the supply until a quantity of 30 (since that is the quantity domestic producers are selling) which is the triangle C + G.
• The government tariff revenue is the tariff multiplied by the imports (because the government doesn't tax the domestic businesses). This would be

  2 * 50 = $100

  ---

  which is the rectangle E. These areas can be summarized below:

Example: Tariff