The graph above shows domestic supply and demand with trade in a SMALL country.With trade,this country can purchase at the world price,Pw.
Suppose that this country imposes a $5 per unit tariff on this good.Which of the following will NOT occur?
A)Government revenue will increase.
B)Domestic consumers will be worse off.
C)Domestic producers will be better off.
D)The gains to the winners will exceed the losses to the losers from the tariff.

Question

The graph above shows domestic supply and demand with trade in a SMALL country.With trade,this country can purchase at the world price,Pw.
Suppose that this country imposes a $5 per unit tariff on this good.Which of the following will NOT occur?
A)Government revenue will increase. 
B)Domestic consumers will be worse off. 
C)Domestic producers will be better off. 
D)The gains to the winners will exceed the losses to the losers from the tariff.

Quizplus · Accepted Answer

The standard analysis of a tariff suggests that some of the gains from trade are shifted from consumers to producers, resulting in a net welfare loss for the country as a whole. However, this loss can be partially offset by the government revenue generated by the tariff. In this case, a $5 per unit tariff will raise the domestic price of the good by $5, making domestic producers better off and domestic consumers worse off. The government revenue generated by the tariff may or may not be sufficient to make up for the welfare loss, depending on the specific details of the market. However, it is possible that the gains to the winners (producers and the government) could exceed the losses to the losers (consumers), so option D is incorrect.

The Graph Above Shows Domestic Supply and Demand with Trade