Individual
Assignment – 10
1 a) Before the tariffs were implemented or under free trade, the imports were Q4-A1.
However, after the tariffs were implemented, the world price rose from Pw to Pt to account for the addition of the tariff.
Pt= Pw + Tariff. (Assumption: the "world" price of lumber was unaffected by the tariff)
Due to the rise in prices, the new equilibrium results in a decrease in the demand for softwood lumber in the US from Q4 to Q3. As a result, domestic softwood lumber suppliers will increase their production, leading to an output increase from Q1 to Q2. Consequently, the number of softwood lumber imports will decrease to Q3 - Q2.
CS = -A -C -B -D
A, B, C – these represent that they have to pay higher prices because of tax on imports on all the units they consume.
D- this represent that they had a WTP prices higher than the world price and would have gotten a net benefit if they traded, but now they have lost it.
PS = +A
GS = +B
SW = -C -D
Deadweight/Efficiency loss= C+D
Area C represents the fact that high-cost domestic production is substituted by cheaper imports.
Softwood lumber producers in the US will benefit from the imposition of tariffs, as they will no longer have to compete at low prices. This is likely to result in increased production of softwood lumber. The welfare analysis suggests that they get an extra revenue of A.
( PS = +A)
On the other hand, the US government will earn revenue from the tariff
, which will be between the price of production (Pt) and the world price (PW) for all units produced between Q3 and Q2. The tariff revenue is represented by the letter B. (GS = +B). they could use this revenue for other social benefits.
US consumers of softwood lumber – Due to the tariff, the availability of cheap softwood lumber for consumers will be limited. As a result, the prices of imported lumber will be similar to those of domestically produced softwood lumber. Consequently, the consumers will consume too little softwood lumber as compared to the quantity consumed during free trade
. However, those consumers who still prefer softwood lumber will have to pay higher prices due to the limited availability of cheaper options. (CS = -A -C -B -D)
