How to Calculate Tariff Revenue
Tariff revenue equals the per-unit tariff times the quantity imported after the tariff, which is domestic quantity demanded minus domestic quantity supplied.
The Tariff Revenue formula
Calculator
Enter the world price, the tariff and both domestic quantities at each price to get revenue on imports only.
The free-trade domestic price, since buyers can import at this price.
Added to the world price to give the new domestic price.
Qd = 100 − 2P at P = 10 gives 80.
Qs = 4P − 20 at P = 10 gives 20.
Qd = 100 − 2P at P = 15 gives 70.
Qs = 4P − 20 at P = 15 gives 40.
Tariff times imports. Multiplying by total consumption instead would claim $350, counting units that never left the country.
- Domestic price with the tariff
- $15
- Imports under free trade
- 60
- Imports after the tariff
- 30
- Total deadweight loss
- $75
- Trade verdict
- Imports continue
The world price plus the tariff. Every domestic buyer and seller now faces this price.
The gap between domestic quantity demanded and domestic quantity supplied at the world price.
Only these 30 units cross a border and pay the tariff.
$50 on the production side, where high-cost domestic output replaces imports, plus $25 on the consumption side, where buyers give up units they valued.
How to calculate Tariff Revenue, step by step
- 1Start from the world price. Under free trade the domestic price equals the world price, and imports fill the gap between domestic quantity demanded and domestic quantity supplied.
- 2Raise the price by the tariff. The new domestic price is the world price plus the per-unit tariff. Every domestic buyer and seller now faces that higher price.
- 3Read both domestic quantities at the new price. Go up the demand curve to find the smaller quantity demanded and up the supply curve to find the larger quantity supplied.
- 4Subtract to get imports. Imports after the tariff = quantity demanded − quantity supplied at the tariff price. This gap is narrower than it was under free trade.
- 5Multiply. Tariff revenue = tariff × imports. On the graph it is the rectangle whose width is the import gap, not the whole quantity consumed.
Worked example: Tariff Revenue
The world price of shirts is $10. Domestic demand is Qd = 100 − 2P and domestic supply is Qs = 4P − 20. At $10, Qd = 100 − 20 = 80 and Qs = 40 − 20 = 20, so imports = 80 − 20 = 60. Now add a $5 tariff, raising the domestic price to $15. At $15, Qd = 100 − 30 = 70 and Qs = 60 − 20 = 40, so imports fall to 70 − 40 = 30. Tariff revenue = $5 × 30 = $150. Multiplying by total consumption of 70 would give $350, which is wrong, since 40 of those shirts are made at home and cross no border. The two deadweight loss triangles are ½ × (40 − 20) × 5 = $50 on the production side and ½ × (80 − 70) × 5 = $25 on the consumption side, for $75 total.
Tariff Revenue questions
Why not multiply the tariff by total domestic consumption?
Because the government collects only on imported units; domestically produced units never cross a border and pay no tariff. Multiplying by total consumption is the most common error on this question.
What happens to tariff revenue if the tariff keeps rising?
It eventually falls to zero, because a prohibitive tariff wipes out imports and leaves nothing to tax. Revenue is highest at a moderate tariff that still lets some trade happen.
How is a quota different from a tariff?
A quota caps the quantity imported instead of taxing it, so the price gap goes to whoever holds the import licenses rather than the government. The government collects revenue only if it auctions those licenses.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated