2. Welfare effects of a tariff in a small country Suppose Guatemala is open to free trade in the world market for oranges. Since Guatemala is small relative to the international market, the demand for and supply of oranges in Guatemala have no impact on the world price. The following graph shows the domestic market for oranges in Guatemala. The world price of a ton of oranges is Pw = $350. On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS). PRICE (Dollars per ton) 710 Domestic Demand Domestic Supply 670 630 590 550 510 470 430 28 8 8 8 8 8 8 8 390 350 P. 310 0 15 30 45 60 75 90 105 120 135 150 QUANTITY (Tons of oranges) CS PS Because Guatemala participates in international trade in the market for oranges, it will import tons of oranges. Now suppose the Guatemalan government decides to impose a tariff of $40 on each imported ton of oranges. Under the tariff, the price Guatemalan consumers pay for a ton of oranges becomes S and Guatemala will import Use the following graph to show the effects of the $40 tariff. tons of oranges.
2. Welfare effects of a tariff in a small country Suppose Guatemala is open to free trade in the world market for oranges. Since Guatemala is small relative to the international market, the demand for and supply of oranges in Guatemala have no impact on the world price. The following graph shows the domestic market for oranges in Guatemala. The world price of a ton of oranges is Pw = $350. On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS). PRICE (Dollars per ton) 710 Domestic Demand Domestic Supply 670 630 590 550 510 470 430 28 8 8 8 8 8 8 8 390 350 P. 310 0 15 30 45 60 75 90 105 120 135 150 QUANTITY (Tons of oranges) CS PS Because Guatemala participates in international trade in the market for oranges, it will import tons of oranges. Now suppose the Guatemalan government decides to impose a tariff of $40 on each imported ton of oranges. Under the tariff, the price Guatemalan consumers pay for a ton of oranges becomes S and Guatemala will import Use the following graph to show the effects of the $40 tariff. tons of oranges.
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Transcribed Image Text:2. Welfare effects of a tariff in a small country
Suppose Guatemala is open to free trade in the world market for oranges. Since Guatemala is small relative to the international market, the demand
for and supply of oranges in Guatemala have no impact on the world price. The following graph shows the domestic market for oranges in Guatemala.
The world price of a ton of oranges is Pw = $350.
On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the
free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS).
PRICE (Dollars per ton)
710 Domestic Demand
Domestic Supply
670
630
590
550
510
470
430
28 8 8 8 8 8 8 8
390
350
P.
310
0
15
30
45
60 75 90
105 120 135
150
QUANTITY (Tons of oranges)
CS
PS
Because Guatemala participates in international trade in the market for oranges, it will import
tons of oranges.
Now suppose the Guatemalan government decides to impose a tariff of $40 on each imported ton of oranges. Under the tariff, the price Guatemalan
consumers pay for a ton of oranges becomes S
and Guatemala will import
Use the following graph to show the effects of the $40 tariff.
tons of oranges.
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