(Figure: World Imports) Refer to the figure. The imposition ofa $20 tariff would generate a value of lost gains from trade of:
A)$45.
B)$90.
C)$70.
D)$160.

Question

(Figure: World Imports) Refer to the figure. The imposition ofa $20 tariff would generate a value of lost gains from trade of:
A)$45. 
B)$90. 
C)$70. 
D)$160.

Quizplus · Accepted Answer

The value of lost gains from trade is the area of the triangle formed by the new price with the tariff (Ptariff), the original price without the tariff (Pworld), and the quantity demanded at the new price with the tariff (Qtariff). In this case, Ptariff=$120, Pworld=$100, and Qtariff=2000. Thus, the area of the triangle is (1/2)*(Ptariff-Pworld)*Qtariff = (1/2)*($20)*2000 = $20,000. The value of lost gains from trade is half of this, or $10,000. Since the tariff revenue is $9,000, the net welfare loss to society is $1,000. Therefore, the correct answer is B) $90.

(Figure: World Imports) Refer to the Figure