Question

Consider a small country that imports good Z. Some of the total quantity of Z domestically consumed is supplied by domestic producers and the rest of it is imported. Then suppose that the government imposed a tariff on each unit of Z that is imported, so that the quantity of Z imported is somewhat reduced. Draw a demand and supply diagram that shows the effect of the tariff. On your diagram clearly label the quantity of imports before the tariff is imposed and after the tariff is imposed. Also, on your diagram, shade-in the areas that represent the Dead Weight Loss associated with the production distortion caused by the tariff (please do not shade-in any other areas). Then provide an explanation for why this area represents this particular Dead Weight Loss. (10 Marks, maximum word limit: 100 words)

Answer 1

Sol :

Equilibrium is the point where demand and supply are equal to each other.

Doemstic ckuntry will import when either world price or domestic supply is less than the domestic demand.

Before tariff on imports :

• Domestic country will import (Q1 - Q2)
• World price is P1
• Import is larger than the import after tariff.

After tariff on imports :

• Domestic country will import (Q3 - Q4)
• World price is P2 + tax
• Import is less as compared to import before tariff.

Deadweigh loss is the loss of trade due to imposing of tariff.

Deadweigh loss is representated by the area shaded in the diagram.

Because due to tariff by the governmeent , import decreases as price paid by the conusmer (world price) increases after tariff.