Using an Appropriate diagram, explain who gains and who loses from the introduction of a tariff.

Question: Using an Appropriate diagram, explain who gains and who loses from the introduction of a tariff.

Demands of the question: This question is part of paper 2, so it takes 20 minutes.  From the question, we know that we have to use a diagram.  The question also explains that we have to discuss BOTH who gains AND who loses.  Also, since it says the “introduction of a tariff”  we must discuss how the economy changes from before having a tariff to after the tariff is put into place.

Triple A: Here are the notes from triple a on “tariffs.”

Protectionism (protecting against imports) has arisen in various forms. These include:

Tariffs

A tariff is a tax on imports, which can either be specific (so much per unit of sale) or ad valorem (a percentage of the price of the product). Tariffs reduce supply and raise the price of imports. This gives domestic equivalents a comparative advantage. As such, tariffs are distorting the market forces and may prevent consumers from gaining the benefit of all the advantages of international specialisation and trade. The impact of a tariff is shown in Figure 1 below.

Figure 1 Impact of a tariff

The tariff has the effect of shifting the world supply curve vertically upwards by the amount of the tariff. The level of imports will fall from QaQd to QbQc. The government will also raise revenue, shown by the blue shaded area. The level of domestic production will increase from 0Qa to 0Qb.

Key Points from Triple A:

• Tariffs are a type of protectionism.
• A tariff is a tax on imported goods.
• Tariffs reduce world supply, which raise the price.
• Prices are higher after tariffs are imposed.
• There are more domestic suppliers after a tariff is imposed, and there are fewer world suppliers after a tariff is imposed.

Power Point Slides on Tariffs:

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Diagram for Tariff:

Evaluation Suggestions: When writing an answer to this question, you need to remember to refer to the diagram.  Explain that the prices rise when tariffs are imposed, so the consumer looses because they have to pay more for a specific product.  Also, world suppliers loose because the world supply is reduced.  You need to refer to this in the diagram by showing the shift in supply curve.  Also refer to the diagram showing that the number of domestic suppliers increase, so they are winners.   However, the world suppliers are reduced, so they lose in this instance.  Talk about dead weight loss and government revenue, and be sure to point out these triangles and rectangles on the diagram that you draw.   Instead of just talking about dead weight loss, refer to the inefficient domestic suppliers who are now able to enter the market.