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, it increases the price of the imported good in the domestic market, leading to a decline in the quantity of the good imported. This is represented by a movement from point A to point B on the demand curve. The domestic market will achieve a new equilibrium at point C, where the quantity demanded equals the quantity supplied domestically. The government will collect revenue from the tariff, which is represented by the area of the rectangle ABGH. However, this revenue is smaller than the area represented by the triangle HFG, as some of the revenue represents a transfer from domestic consumers to the government, rather than a net gain. Therefore, option E is incorrect. Option D is incorrect because the market achieves a new equilibrium at point C, not the original equilibrium at point A. Option A is incorrect because the revenue from the tariff will be less than the area represented by the triangle HFG.

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