The diagram below shows the domestic demand and supply curves for cotton towels in Canada.The prevailing world price of cotton towels is P W .Assume that all cotton towels are identical. FIGURE 33-3
-Refer to Figure 33-3.If Canada imposes a tariff of $t per cotton towel,the deadweight loss to the Canadian economy is shown by area

Question

The diagram below shows the domestic demand and supply curves for cotton towels in Canada.The prevailing world price of cotton towels is P W .Assume that all cotton towels are identical.  FIGURE 33-3
-Refer to Figure 33-3.If Canada imposes a tariff of $t per cotton towel,the deadweight loss to the Canadian economy is shown by area

Quizplus · Accepted Answer

The deadweight loss from a tariff is the loss of consumer and producer surplus that results from the reduction in trade caused by the tariff. In this case, the imposition of a tariff results in a reduction in the quantity of cotton towels traded, as shown by the decrease in imports and the increase in domestic production.

The deadweight loss is shown by the area of the triangle formed by points B, D, and the intersection of the world price and domestic supply curves. This is because this area represents the loss of consumer surplus (represented by area B) and producer surplus (represented by area D) that results from the reduction in trade. Therefore, the correct answer is C, B + D.

Note that areas A and H represent government revenue and the transfer of surplus from consumers to producers, respectively, and do not contribute to the deadweight loss. Area A represents government revenue equal to the tariff per unit multiplied by the quantity of imports, while area H represents the transfer of surplus from consumers to producers due to the increase in domestic price. Area C represents the increase in producer surplus resulting from the tariff, but does not contribute to deadweight loss as it represents a transfer of surplus from consumers to producers.

The Diagram Below Shows the Domestic Demand and Supply Curves