Trade and tariffs | APⓇ Microeconomics | Khan Academy | Summary and Q&A

TL;DR

Trade can increase total economic surplus by expanding consumer surplus but may harm domestic producers, while tariffs decrease consumer surplus and create deadweight loss but generate government revenue.

Key Insights

• 🤗 Opening trade to the world price expands the total economic surplus by increasing consumer surplus.
• 😚 Domestic producers may lose surplus when the market opens to trade, but overall, the total economic surplus grows.
• 🌸 Tariffs decrease consumer surplus and create deadweight loss, while increasing domestic producer surplus and generating government revenue.
• ™️ Trade policies like tariffs can have consequences for both producers and consumers, and may impact the overall economic surplus.
• 🤨 Governments may impose tariffs to protect domestic industries or raise revenue but should consider the trade-off in terms of economic surplus.
• ™️ Quotas are another trade policy option that restrict the total amount of imports, which can also impact economic surplus.
• 🎨 Balancing the interests of producers, consumers, and government revenue is essential in designing effective trade policies.

Transcript

• [Instructor] In this video, we're gonna think about how trade affects the total economic surplus in a market, and we're also gonna think about tariffs, which are a per unit charge that a government will often put on some type of good that is being imported, usually to protect a domestic industry, but sometimes it's also to raise revenue. So, righ... Read More

Questions & Answers

Q: How does trade opening to the world price affect the total economic surplus in a market?

Trade opening to the world price increases the total economic surplus. It expands consumer surplus while potentially reducing producer surplus by allowing consumers to access goods at a lower price.

Q: What is the impact of tariffs on consumer surplus?

Tariffs decrease consumer surplus by increasing prices for imported goods. Consumers have to pay the tariff on top of the world price, resulting in lower surplus compared to free trade scenarios.

Q: What happens to the producer surplus when tariffs are imposed?

Imposing tariffs can increase domestic producer surplus. The higher price due to the tariff allows domestic producers to gain more surplus from their production.

Q: How does a tariff affect government revenue and deadweight loss?

Tariffs generate revenue for the government, calculated by multiplying the tariff amount by the imported quantity. However, there is deadweight loss created by the tariff, resulting in a portion of the total economic surplus being lost.

Summary & Key Takeaways

• Trade opening to the world price increases consumer surplus and expands the total economic surplus. Producers may lose out on some surplus.

• Tariffs imposed on imported goods increase the price for consumers and decrease consumer surplus. Domestic producers benefit from increased producer surplus.

• The government collects revenue from tariffs, calculated by the tariff amount multiplied by the imported quantity. However, there is a portion of the total economic surplus that becomes deadweight loss.