Principles of Economics- Mankiw (5th) 182

Principles of Economics- Mankiw (5th) 182 - 188 PA R T T H...

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188 PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE Once the government imposes a tariff, the domestic price exceeds the world price by the amount of the tariff. Consumer surplus is now area A ± B. Producer surplus is area C ± G. Government revenue, which is the quantity of after-tariff imports times the size of the tariff, is the area E. Thus, total surplus with the tariff is area A ± B ± C ± E ± G. To determine the total welfare effects of the tariff, we add the change in con- sumer surplus (which is negative), the change in producer surplus (positive), and the change in government revenue (positive). We find that total surplus in the market decreases by the area D ± F. This fall in total surplus is called the dead- weight loss of the tariff. DE F C G B A Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Price with tariff Tariff Imports without tariff Equilibrium without trade Price without tariff World price Imports with tariff
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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