The diagram below shows the situation of a small country with free-trade in an imported product (at a price of $10) and the situation with a tariff on the product (at a price of $11) . In this graph, the net welfare loss (or total deadweight loss) to the country from the imposition of the tariff is __________.

Question

The diagram below shows the situation of a small country with free-trade in an imported product (at a price of $10) and the situation with a tariff on the product (at a price of $11) . In this graph, the net welfare loss (or total deadweight loss) to the country from the imposition of the tariff is __________.
The diagram below shows the situation of a small country with free-trade in an imported product (at a price of $10) and the situation with a tariff on the product (at a price of $11) . In this graph, the net welfare loss (or total deadweight loss) to the country from the imposition of the tariff is __________. A) $2 B) $6 C) $32 D) $44

Quizplus · Accepted Answer

The net welfare loss due to the imposition of a tariff can be calculated as the difference between the triangles representing the deadweight loss and the government revenue. In this case, the deadweight loss is the combined area of triangles A and C, which equals 0.5 x 4 x 4 = $8, and the government revenue is the area of rectangle B, which equals 1 x 4 = $4. Therefore, the net welfare loss is $8 - $4 = $4. As the tariff increases the price from $10 to $11, consumers pay an extra $1 for each unit of the product. This results in a decline in consumption from OQ1 to OQ2, and domestic producers increase their output from OQ1 to OQ3. The loss to consumers is represented by the area of triangle A, which is 0.5 x 1 x 4 = $2, and the loss to producers is represented by the area of triangle C, which is 0.5 x 1 x 2 = $1. Therefore, the deadweight loss is $2 + $1 = $3, and the government revenue generated by the tariff is $1 x 4 = $4. Thus, the net welfare loss is $3 + $4 = $7. In contrast, with free trade, the total surplus (or welfare) of the country is represented by the area of the rectangle OABC, which equals 4 x 10 = $40. Therefore, the net welfare loss due to the imposition of the tariff is $40 - $33 = $7, which is the answer for option B.

The Diagram Below Shows the Situation of a Small Country