Tariff and imports worked example | APⓇ Microeconomics | Khan Academy

TL;DR

Loriland's sugar market analysis reveals the quantity of imported sugar, the impact of a tariff on domestic production, the domestic consumer surplus, the government's tariff revenue, and the ideal per-unit tariff for maximizing economic surplus.

Transcript

• [Instructor] We're told sugar is freely traded in the world market. Assume that a country, Loriland, is a price taker in the world market for sugar. Some of the sugar consumed in Loriland is produced domestically while the rest is imported. The world price of sugar is $2 per pound. The graph below shows Loriland's sugar market, and P sub W repres... Read More

Key Insights

• 💷 Loriland imports 12 million pounds of sugar at a world price of $2 per pound.
• 🤨 A tariff of $2 raises the domestic price to $4.
• 👶 The new level of domestic production is 6 million pounds at a domestic price of $4.
• ❓ The domestic consumer surplus in Loriland is $25 million at a price of $4.
• 💷 The government collects $8 million in tariff revenue with a $2 per pound tariff.
• 🌸 Any tariff, although generating government revenue, decreases total economic surplus by causing deadweight loss.

Questions & Answers

Q: How much sugar does Loriland import at the world price of $2 per pound?

Loriland imports 12 million pounds of sugar at a world price of $2 per pound, considering that its domestic demand is 14 million pounds and the domestic production is 2 million pounds.

Q: What is the new level of domestic production in Loriland when a tariff raises the domestic price to $4?

With a domestic price of $4 and the tariff in place, the new level of domestic production in Loriland is 6 million pounds, as indicated by the willingness of domestic suppliers.

Q: How is the domestic consumer surplus calculated in Loriland when the price is $4?

The domestic consumer surplus in Loriland, with a price of $4, can be calculated by multiplying the quantity demanded (10 million pounds) by the height of the consumer surplus triangle ($5 per pound) and then taking half of that value. The result is $25 million.

Q: What is the total tariff revenue collected by the government in Loriland?

The government in Loriland collects $8 million in tariff revenue. This is calculated by multiplying the quantity of imports affected by the tariff (4 million pounds) by the tariff rate ($2 per pound).

Summary & Key Takeaways

• Loriland imports 12 million pounds of sugar at a world price of $2 per pound, with domestic production being 2 million pounds and domestic demand at 14 million pounds.

• With a tariff of $2, the new domestic price is $4, resulting in a new level of domestic production of 6 million pounds.

• The domestic consumer surplus in Loriland, where the price is $4, is calculated to be $25 million.

• The government collects $8 million in tariff revenue with the $2 per pound tariff on 4 million pounds of imports.