The following image shows the market for wheat for the country of Palatino. S^D is the domestic supply of wheat, and D^D is the domestic demand for wheat. Suppose the world price of wheat is $9 per bushel of wheat. Suppose a specific tariff of $6 is imposed on each bushel of wheat imported. Government revenue from the tariff equals:
Figure 19.4

Question

The following image shows the market for wheat for the country of Palatino. S<sup>D</sup> is the domestic supply of wheat, and D<sup>D</sup> is the domestic demand for wheat. Suppose the world price of wheat is $9 per bushel of wheat. Suppose a specific tariff of $6 is imposed on each bushel of wheat imported. Government revenue from the tariff equals: Figure 19.4 A) $45,000. B) $3,000,000. C) $1,800,000. D) $900,000. E) $50,000.

Quizplus · Accepted Answer

To find the government revenue from the tariff, we need to determine the quantity of wheat imported before and after the tariff is imposed. Without the tariff, the country would import the amount of wheat represented by the distance between the world price ($9) and the domestic supply curve (S^D) at the world price, which is 12 million bushels (point A in the graph). With the tariff of $6 per bushel, the price of imported wheat increases to $15 per bushel (the world price of $9 plus the tariff of $6). At this higher price, the quantity of wheat imported decreases to zero, and the domestic quantity demanded is met entirely by domestic production. Thus, the quantity of wheat imported with the tariff is zero (point B in the graph). To find the government revenue from the tariff, we need to calculate the tariff per unit of wheat ($6) and multiply it by the quantity of wheat imported with the tariff (which is zero). Thus, the government revenue from the tariff is: $6 per bushel x 0 bushels imported = $0 However, we also need to account for the lost consumer surplus due to the higher price of wheat. To do this, we can find the area of the triangle formed by the tariff-inclusive price ($15), the original equilibrium price ($7), and the quantity of wheat demanded at the tariff-inclusive price (6 million bushels, point C in the graph). The base of the triangle is 6 million bushels (the difference between the quantity demanded at the tariff-inclusive price and the quantity demanded at the original equilibrium price), and the height is $8 per bushel (the difference between the tariff-inclusive price and the original equilibrium price). Thus, the lost consumer surplus is: 0.5 x 6 million bushels x $8 per bushel = $24 million Therefore, the total welfare loss from the tariff is $24 million, which is equal to the revenue gained by producers ($24 million) plus the government revenue from the tariff ($0): Total welfare loss = lost consumer surplus + revenue gained by producers + government revenue from tariff $24 million = $0 + $24 million + $0 Finally, we can calculate the government revenue from the tariff by subtracting the revenue gained by producers from the total welfare loss: Government revenue from tariff = Total welfare loss - Revenue gained by producers = $24 million - $1.2 million per bushel x 10 million bushels produced domestically = $12 million - $12 million = $0 Therefore, the government revenue from the tariff is $0. However, it is important to note that the tariff still results in a loss of welfare for the country as a whole.

The Following Image Shows the Market for Wheat for the Country