Question

Consider an importing with an import demand function given by p=120-2q, which faces an export supply function of p=q. The government decides to impose a tariff of $3 per units of imports
1. calculate the Domestic Price and consumption before and after the imposition of tariff.
2. What is the world price of the imports before and after the imposition of the tariff?
3. Does this country benefit from the imposition of tariffs? By how much?

Answer 1

1. In the domestic country who is importing is facing an import demand

p = 120 - 2q which is nothing but excess demand or domestic demand - domestic supply

Now , in the domestic economy, equilibrium will occur where excess demand is 0

I.e Q = (120- p)/2 = 0

Or p = 120,

2. World price will be determined at the equilibrium of import demand and export supply

I.e 120-2q = q

Or 3q = 120

Or q = 40 and p = 40. Hence the world price is 40

After imposition of tarrif , price will increase to 40+3= 43

At this price, import demand will be

43 = 120 - 2q

2q = 77

Or q = 38.5

3. The country doesn't benefit from the tarrif when it ia open tp trade because world prices increase from 40 to 43 and consumption falls by 1.5. But if you compare the tarrif situation with no trade, then tje country certainly benefits even after tarrif is importes as prices decrease from 120 to 43 and quantity increase by 38.5