Domestic producers enjoy a gain in their surplus.

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Domestic producers enjoy a gain in their surplus.

Post by jancancook on Sun Nov 06, 2011 7:28 pm

Domestic producers enjoy a gain in their surplus. Producer surplus, defined as the difference between what the producers were willing to receive by selling a good and the actual price of the good, expands from the region below Pw to the region below Pt. Therefore, the domestic producers gain an amount shown by the area A.
Domestic consumers face a higher price, reducing their welfare. Consumer surplus is the area between the price line and the demand curve. Therefore, the consumer surplus shrinks from the area above Pw to the area above Pt, i.e. it shrinks by the areas A, B, C and D.
The government gains from the tariffs. It charges an amount PtPt* of tariff for every good imported. Since S*D* goods are imported, the government gains an area of C and E.
Interestingly, the triangles B and D are lost by the consumers without any gain by any other party within the society. Therefore, areas B and D represent the dead weight lost to the society.
The net loss to the society due to the tariff would be given by the total costs of the tariff minus its benefits to the society. Therefore, we can conclude that the net welfare loss due to the tariff is equal to:
Consumer Loss Government revenue Producer gain


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