🌍 Question 4 – Welfare Impact of Tariff by a Large Country

What is the immediate effect of a tariff on domestic prices?

Price increases from Pw to Pt, reducing imports.

What is the impact on consumer surplus after a tariff?

Consumer surplus decreases by areas A + B + C + D.

What is the producer surplus change from a tariff?

Producer surplus increases by area A.

What does the government gain from imposing a tariff?

Tariff revenue (area C) and terms-of-trade gain (area J).

What are the deadweight losses in a large country tariff diagram?

Areas B and D: inefficiency from overproduction and underconsumption.

What is the formula for net welfare change from a tariff?

ΔWelfare = –B – D + J.

Under what condition does a tariff improve welfare?

If J (terms-of-trade gain) is greater than B + D (deadweight losses).

How does a large country affect world prices with a tariff?

It reduces world price (Pw to Pw'), improving its terms of trade.