Tariff Diagram – ProtectionismSL
Global EconomicsThis diagram shows the effects of a tariff imposed on imported goods. A tariff raises the price of imports, protecting domestic producers but creating welfare losses.
Curves and elements
- dd
- Dd: Domestic demand curve for the good.
- sd
- Sd: Domestic supply curve for the good.
- pw
- Pw: World price under free trade conditions.
- pw tt
- Pw+T: Price with tariff imposed.
- q1
- Q1: Domestic quantity supplied under free trade.
- q2
- Q2: Domestic quantity supplied with tariff.
- q3
- Q3: Quantity demanded with tariff.
- q4
- Q4: Quantity demanded under free trade.
- imports no tariffs
- Imports without tariff: Q4 - Q1.
- imports with tariffs
- Imports with tariff: Q3 - Q2.
- government revenue
- Government Revenue: Area of the rectangle formed between Q2 and Q3 at the tariff amount.
- welfare loss
- Welfare Loss: Deadweight losses represented by two triangles on each side of the tariff revenue rectangle.
Key explanations
- 1
Under free trade, the world price (Pw) allows for cheaper imports, leading to higher quantity demanded (Q4) and lower domestic production (Q1).
- 2
When a tariff is imposed, the price increases to Pw+T (world price plus tariff), reducing imports to the range between Q2 and Q3.
- 3
Domestic producers increase supply from Q1 to Q2, while domestic consumers reduce demand from Q4 to Q3 due to higher prices.
- 4
The government earns tariff revenue on each unit imported (Q3 - Q2), while two deadweight welfare losses occur: one from inefficient domestic production and one from reduced consumption.
- 5
Tariffs protect domestic industries in the short run but may reduce overall welfare and lead to retaliation in global trade.
Example exam question
Using a tariff diagram, explain the effects of an import tariff on consumer surplus, producer surplus, government revenue, and overall welfare.
Show example answer
A tariff raises the price of imports, reducing the quantity imported. Consumer surplus falls due to higher prices and lower consumption. Producer surplus increases as domestic producers expand output. The government gains tariff revenue (shaded rectangle), but society experiences welfare losses due to inefficiencies in production and reduced consumption (two shaded triangles).
