A Trade Dispute Tariff Is Repealed
A tariff left over from a trade dispute is removed, so the price inside the country drops back to the world price, imports widen, and the deadweight loss disappears.
A Trade Dispute Tariff Is Repealed
International TradeA tariff left over from a trade dispute is removed, so the price inside the country drops back to the world price, imports widen, and the deadweight loss disappears.
Equilibrium at Quantity 64, Price ($) 49
Where free trade would sit
This small country imports the good. Start by fixing the free trade position in mind. At the world price Pw, domestic quantity demanded on the demand curve exceeds domestic quantity supplied on the supply curve, and imports fill the gap. That is the position the market will return to once the tariff is gone.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
A Trade Dispute Tariff Is Repealed, step by step
- 1
Where free trade would sit
This small country imports the good. Start by fixing the free trade position in mind. At the world price Pw, domestic quantity demanded on the demand curve exceeds domestic quantity supplied on the supply curve, and imports fill the gap. That is the position the market will return to once the tariff is gone.
- 2
The dispute-era tariff is in place
A trade dispute several years ago left a per-unit tariff on this good, so the price inside the country is Pw plus the tariff. At that higher price domestic producers sit further up their supply curve and domestic buyers sit further up their demand curve. Imports are the narrow gap that survives between those two quantities, and the government collects the tariff on each of them.
- 3
The tariff is repealed
The dispute is settled and the tariff is removed, so it falls back to zero and the price inside the country drops the whole way to the world price. Neither domestic curve moves. A tariff was never a determinant of domestic supply or domestic demand: it only changed the price at which those curves were read.
- 4
Imports widen again
At the world price domestic producers slide back down along their supply curve and cut output, while domestic buyers slide down along their demand curve and buy more. Both are movements along unchanged curves. The gap between the two quantities reopens, so imports climb back to their free trade size.
- 5
The deadweight loss disappears
Producer surplus falls back to its free trade level and the government loses its tariff revenue, but consumer surplus rises by more than those two losses combined. The extra is precisely the two deadweight loss triangles the tariff had opened, so repealing it hands that lost value back to the economy.
Where it ends up
Repealing a tariff returns the domestic price to the world price, so domestic production falls, consumption rises, imports widen, and both deadweight loss triangles close, raising total surplus.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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