Isn’t free trade how all the world’s developed countries have become rich?


US Automobile Market (with tariff)



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2. Protectionism - Standard Level
US Automobile Market (with tariff)

P

Q



Sd

Dd

Pd



Qe

Pw

Q3



Q1

Sworld


Q2-Q4= The number of imported cars after the tariff

Pw+2000


Sworld w/tariff

Q2

Q4

Effect of the tariff on all stakeholders
  • On consumers: Consumer surplus (the blue triangle) is now a smaller area, since the price is higher and quantity lower.
  • On domestic producers: Producer surplus (the red triangle) is now greater, since domestic producers sell more cars at a higher price
  • On foreign producers: Foreign producers are worse off. They sell fewer cars and earn less revenue than they did before the tariff
  • On the government: The government levying the tariff earns revenue equal to the green rectangle.
  • On total welfare: There is a net loss of total welfare equal to the two black triangles. Society as a whole is worse off because fewer cars are consumed but more are produced by the relatively inefficient domestic producers.

Protectionist Tariffs


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