This problem asks you to evaluate (roughly) the welfare effects of a tariff when
ID: 1204339 • Letter: T
Question
This problem asks you to evaluate (roughly) the welfare effects of a tariff when you have data on imports levels, import demand elasticity and import supply elasticity. The rough estimates come from assuming everything is linear. You may draw the curves and label the areas involved in your answer. The data you have is that current imports of cars into the U.S. stand at 20 million units and make up half of the total market. Their average price is $10,000. Moreover, the demand for imports has an elasticity of 1.1: a 10% fall in price will raise import demand by roughly 11%. Assuming that world prices are fixed, i.e. the U.S. is small relative to the world, products are homogeneous, and that U.S. supply is completely inelastic, explain what the effect would be (on producer profits, consumer surplus, and net welfare) of a 11% tariff. Suppose that the supply of imports from the rest of the world has unitary elasticity, how would your answer to a) change? Draw a picture to illustrate your arguments. (Remember that with linear supply, the supply curve that goes though the origin has unitary elasticity) If the U.S. government became more concerned with raising revenue, would you expect tariffs to rise or fall or stay the same? Why? Explain what you understand by the optimum tariff. Must it be less than the revenue maximizing tariff for a large country? Why?Explanation / Answer
answer a) with the imposition of 11% tariff
producer's profits will increase
consumer surplus will fall as price increases
net welfare will fall- higher the tariff is set ,larger will be the loss in national welfare
answer b)unitary elasticity means 10 % fall in price leads to 10% increase in demand, changes will be same more producer surplus ,less consumer surplus,%10.
answerc) as far as US government revenue is concerned they will put an increase to tariffs as it causes an increase in their revenue receipts.
answer d)Whenever tariffs are imposed the income of imposing country increases,but tariff should always be within alimit. Larger the elasticity of foreign export supply,smaller the optimal tariff rate is.
Optimum tariff refers to that rate of tariff which itersects opposite country's offer curve at a point which is tangent to the imposing country's highest indifference curve.
The net contribution of the tariff to the welfare is less than revenue ,hence it is less than revenue maximizing tariff for alarge country.
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