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8. Tariffs Suppose the nation of Isoland is an importer of textiles...

8. Tariffs

Suppose the nation of Isoland is an importer of textiles and is looking for a way to raise government revenue. The following graph shows the effect of a tariff on textile imports.

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Having rejected a tariff on textiles (a tax on imports), the president of Isoland is now considering the same-sized tax on textile consumption (including both imported and domestically produced textiles). Compared to the free trade scenario, the quantity of textiles consumed in Isoland will , and the quantity produced in Isoland will under a textile consumption tax. The following table shows the effect of an import tariff on the nation of Isoland. Complete the remaining columns of the following table by indicating the effect of the same-sized tax on textile consumption. Under Tariff Under Consumption Tax Before Tariff or Tax After Change After Change Consumer Surplus A + B + C+ D +E +F A + B - (C + D + E + F) Producer Surplus G C + G +C Government Revenue None E +E Total Surplus A+B + C+D+E+F+G A+B+C+E+G - (D + F) The raises more revenue for the government, and the has a smaller deadweight loss associated with it.

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