CHAPTER 9APPLICATION: INTERNATIONAL TRADE189It is not surprising that a tariff causes a deadweight loss, because a tariff is atype of tax. Like any tax on the sale of a good, it distorts incentives and pushes theallocation of scarce resources away from the optimum. In this case, we can identifytwo effects. First, the tariff on steel raises the price of steel that domestic producerscan charge above the world price and, as a result, encourages them to increase pro-duction of steel (from Q1Sto Q2S). Second, the tariff raises the price that domesticsteel buyers have to pay and, therefore, encourages them to reduce consumptionof steel (from Q1Dto Q2D). Area D represents the deadweight loss from the overpro-duction of steel, and area F represents the deadweight loss from the undercon-sumption. The total deadweight loss of the tariff is the sum of these two triangles.THE EFFECTS OF AN IMPORT QUOTAThe Isolandian economists next consider the effects of an import quota—a limit onthe quantity of imports. In particular, imagine that the Isolandian government dis-
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