The following graph shows the domestic market for steel in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of steel. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $210 per ton of steel and a quantity of 16 million tons. At this price, the United States imports 12 million tons of steel. Suppose the U.S. government imposes a $75-per-ton tariff on steel imports.
The following graph shows the domestic market for steel in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of steel. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $210 per ton of steel and a quantity of 16 million tons. At this price, the United States imports 12 million tons of steel. Suppose the U.S. government imposes a $75-per-ton tariff on steel imports.
Chapter20: International Trade
Section: Chapter Questions
Problem 11QP
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Transcribed Image Text:The following graph shows the domestic market for steel in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand
curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world
price of steel. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of steel that both domestic and
foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $210 per ton of steel
and a quantity of 16 million tons. At this price, the United States imports 12 million tons of steel.
Suppose the U.S. government imposes a $75-per-ton tariff on steel imports.
On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (SD+W+T). Then use the grey
point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff.
PRICE (Dollars per ton)
420
390
360
330
300
270
240
210
180
150
120
F
0
SD+W
2
DD
+
6
8
10
12
14 16
QUANTITY OF STEEL (Millions of tons)
4
Sp
18 20
SD+W+T
Equilibrium Under Tariff
Domestic Revenue Effect
Terms-of-Trade Effect
Deadweight Loss
?
Transcribed Image Text:The tarrif's revenue effect (the import tariff multiplied by the quantity of steel imported) can be broken into two components:
• Domestic revenue effect
• Terms-of-trade effect
On the previous graph, use the green rectangle (triangle symbols) to indicate the domestic revenue effect of the tariff. Then use the purple rectangle
(diamond symbols) to indicate the terms-of-trade effect.
Now consider the effect of the tariff on welfare in the United States. On the previous graph, use the black triangles (plus symbols) to indicate the
deadweight loss caused by the tariff.
True or False: National welfare in the United States decreases as a result of a $75-per-ton tariff on steel imports.
True
O False
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