Question

What is the change in total surplus when a large country switches from free trade to using a tariff?

What are the terms of trade gain when a large country applies a per-unit tariff?

What is an optimal tariff for a large country?

Answer 1

There exists a negative change in the total surplus when a large country switches from free trade to tariffs. Because now the domestic producers are at an advantage of selling in their country and prefer not to export. And the customers can't buy from abroad, so they have to buy from the domestic producers. This creates a rise in the prices and advntage to producers. Resulting in reduction of Total surplus.

Per unit tariffs will increase the price of imported goods. But encourage the export of domestic goods. If the government provides subsides for exports and charges per Unit tariffs on import, then the trde gain will be that more exports compared to imports. This is because large countries import in large numbers. And when you charge per unit tariffs, that increases the cost much more.

the optimal tariffs for a large country is a positive tariffs, but not so high as to eliminate the trade entirely. This means that a large country can impose a tariffs rate, because of it's power in the market. But they need to ensure that it is to a limit where it does not affect the trade.