Show what a tariff does to price, quantity and welfare
7 min
5 questions
Key terms
Tariff
A tariff is a tax that a government places on imported goods and services, which makes imports more expensive for consumers.
Deadweight loss
Deadweight loss is the loss in social surplus that occurs when an economy produces at an inefficient quantity.
A tariff lifts the domestic price, and home firms supply more
1 of 3
Free tradeAt the world price Pw, home firms supply Q1 and buyers want Q4. Imports fill the gap between them.
The tariff moves the price up from the world price Pw to Pt, and domestic firms raise their output from Q1 to Q2.
With free trade the country buys at the world price Pw. Home firms supply Q1 at that price, and imports fill the gap between Q1 and what buyers want.
The tariff adds its full amount to the price of every import, so the domestic price rises from Pw to Pt. Home firms now meet a higher price and move up their supply curve, selling more at a higher price.
Producer surplus rises by the strip between Pw and Pt, out as far as the supply curve. That gain is why protected producers ask for tariffs.