The figure below shows the demand (D) and supply (S) curves of a good produced domestically in an economy as well as traded in the international market. Figure 21.1 In the figure,
P₁: Price of the good in the international market.
P₂: Price of the good in the domestic market after the imposition of tariff by the government.
P₃: No-trade price of the good in the domestic market.
-Refer to Figure 21.1.If the government imposes a tariff such that the price of the good in the domestic market is P₂ when the international price is P₁:

Question

The figure below shows the demand (D) and supply (S) curves of a good produced domestically in an economy as well as traded in the international market. Figure 21.1

In the figure,
P₁: Price of the good in the international market.
P₂: Price of the good in the domestic market after the imposition of tariff by the government.
P₃: No-trade price of the good in the domestic market.
-Refer to Figure 21.1.If the government imposes a tariff such that the price of the good in the domestic market is P₂ when the international price is P₁:

Quizplus · Accepted Answer

When the government imposes a tariff, the price of the good in the domestic market increases to PS1U1B12S1U1B0, which is higher than the no-trade price of PS1U1B13S1U1B0. This reduces the quantity demanded domestically (QD1U1B12S1U1B0) and increases the quantity supplied domestically (QS1U1B12S1U1B0). However, the domestic producers cannot supply the entire domestic demand at the new higher price, so some of the demand is met by imports. The quantity of imports declines from QS1U1B14S1U1B0 to QS1U1B15S1U1B0 as the tariff makes imports more expensive. Therefore, the import of the good by the domestic country declines.

The Figure Below Shows the Demand (D) and Supply (S)