Figure 17-12 If the country illustrated in Figure 17-12 is initially trading without restrictions at a world price of $1.00, the loss of consumer surplus as a result of a tariff of $0.50 per unit is represented by area

Question

Figure 17-12  If the country illustrated in Figure 17-12 is initially trading without restrictions at a world price of $1.00, the loss of consumer surplus as a result of a tariff of $0.50 per unit is represented by area

Quizplus · Accepted Answer

The loss of consumer surplus is represented by the area between the world price line and the post-tariff price line, above the quantity consumed domestically. This area can be divided into several sub-areas.

Area c represents the government revenue collected from the tariff.

Area i represents the increase in producer surplus as domestic producers are able to sell at a higher price.

Areas e and f together represent the deadweight loss of the tariff, as the reduction in trade leads to a reduction in total surplus.

Finally, area d is not affected by the tariff, as it represents the difference between the world price and the cost of production for domestic producers, a measure of their efficiency.

Therefore, the total loss of consumer surplus is represented by the sum of areas c, e, f, and i, which is choice C.

Figure 17-12 If the Country Illustrated in Figure 17-12