ec340ch5 (3) - Effect of the Tariff Home price rises to PW...

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Effect of the Tariff Home price rises to P W +t thereby decreasing the quantity demanded at Home. Higher prices increase the quantity supplied at Home. Less excess demand therefore imports fall. These changes affect producer and consumer surplus, and overall Home welfare. Effect of the Tariff on Consumer Surplus With the tariff, consumers now pay the higher price, P W +t , and their surplus is the area under the demand curve and above the higher price, P W +t . The fall in consumer surplus due to the tariff is the area in-between the two prices and to the left of Home demand, ( a+b+c+d ) in the next figure. This area is the amount that consumers lose due to the higher price caused by the tariff. Effect of the Tariff on Producer Surplus With the tariff, producer surplus is the area above the supply and below the higher price, P W +t . Since the tariff increases Home price, firms can sell more goods, and producer surplus increases This area,
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ec340ch5 (3) - Effect of the Tariff Home price rises to PW...

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