The figure given below shows the U.S. market for imported wine. For simplicity, we consider export supply curves to be flat. Chilean wine is available for $480 per barrel and French wine is available for $420 per barrel. Suppose the United States has a tariff of $80 per barrel on imported wine. Then, the United States joins a trade bloc with Chile. Calculate the loss suffered by the U.S. arising from the shift of trade from low-cost exporters to higher-cost bloc-partner exporter.

Question

The figure given below shows the U.S. market for imported wine. For simplicity, we consider export supply curves to be flat. Chilean wine is available for $480 per barrel and French wine is available for $420 per barrel.  Suppose the United States has a tariff of $80 per barrel on imported wine. Then, the United States joins a trade bloc with Chile. Calculate the loss suffered by the U.S. arising from the shift of trade from low-cost exporters to higher-cost bloc-partner exporter.

Quizplus · Accepted Answer

Before joining the trade bloc, the U.S. purchases 100 million barrels of wine from Chile at $480 per barrel and 200 million barrels of wine from France at $420 per barrel. With the $80 tariff, the U.S. consumer price for Chilean wine is $560, while the price for French wine remains at $420.

After joining the trade bloc, the U.S. eliminates the $80 tariff on Chilean wine, making the price equal to $480 per barrel. As a result, the U.S. increases its purchase of Chilean wine to 175 million barrels and decreases its purchase of French wine to 125 million barrels.

The deadweight loss suffered by the U.S. as a result of the trade bloc can be calculated as the difference between the total consumer surplus before and after the trade bloc.

Before the trade bloc:
Consumer surplus for Chilean wine = (1/2) x 100 million x (480 - 420) = $30 million
Consumer surplus for French wine = (1/2) x 200 million x (420 - 80) = $34 billion
Total consumer surplus = $34.03 billion

After the trade bloc:
Consumer surplus for Chilean wine = (1/2) x 175 million x (480 - 420) = $5.25 billion
Consumer surplus for French wine = (1/2) x 125 million x (420 - 80) = $18.75 billion
Total consumer surplus = $24 billion

Therefore, the deadweight loss suffered by the U.S. is $10.03 billion or $600 million rounded to the nearest hundred million.

The Figure Given Below Shows the U