The reason for the area of part A and B to be considered as the deadweight loss from tariff in the given diagram.

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Chapter 8, Problem 14Q

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The reason for the area of part A and B to be considered as the deadweight loss from tariff in the given diagram.

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Having rejected a tariff on textiles (a tax on imports), the president of Isoland is now considering the same-sized tax on textile consumption (including both imported and domestically produced textiles). Under a textile consumption tax, the quantity of textiles consumed in Isoland will be (SAME AS, HIGHER , LOWER) the quantity consumed under a tariff, and the quantity produced in Isoland will be (SAME AS, HIGHER , LOWER) the quantity produced under a tariff. The following table shows the effect of an import tariff on the nation of Isoland. Compared to the consumption tax, the tariff raises (LESS, MORE , SAME AMOUNT) revenue for the government and has (SMALLER, LARGER, EQUAL SIZE) deadweight loss associated with it.

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Assume that the functions of a demand curve and of a supply curve of a small country M for commodity X are Dx = 130 – Px and Sx = -10 + Px respectively. The unit price of commodity X imported from the rest of the world is 10 USD in the condition of the free trade. Draw the graph and calculate the increase of the producer’s surplus, the decrease of the consumer’s surplus, and the government revenue if the country M would impose the import tariff at the rate of 20% on the commodity X imported from the rest of the world?