Chapter 9, Problem 7E

The United States currently imports all of its coffee. The annual demand for coffee by U.S. consumers is given by the demand curve Q = 250 − 10P, where Q is quantity (in millions of pounds) and P is the market price per pound of coffee. World producers can harvest and ship coffee to U.S. distributors at a constant marginal (= average) cost of $8 per pound. U.S. distributors can in turn distribute coffee for a constant $2 per pound. The U.S. coffee market is competitive. Congress is considering a tariff on coffee imports of $2 per pound.

1. a. If there is no tariff, how much do consumers pay for a pound of coffee? What is the quantity demanded?
2. b. If the tariff is imposed, how much will consumers pay for a pound of coffee? What is the quantity demanded?
3. c. Calculate the lost consumer surplus.
4. d. Calculate the tax revenue collected by the government.
5. e. Does the tariff result in a net gain or a net loss to society as a whole?