What this lesson teaches
I can weigh the benefits and costs of protectionism.
Syllabus 9570, 3.3.1(d). Globalisation, International Trade and Economic Co-operation: Benefits and costs of protectionism
Make a guess
A tariff raises producer surplus and brings in tariff revenue. Is the country as a whole better off?
- No. Consumers lose more than producers and government gain.
- Yes, because two groups gain and only one loses.
- No. Producers gain less than the government collects.
Show the answer
No. Consumers lose more than producers and government gain.
The gains come out of consumer surplus, and two triangles are lost to everyone: the production and consumption losses.
Consumers lose, domestic producers and the government gain, and the country as a whole is worse off.
Consumers pay a higher price and buy less, so consumer surplus falls by areas a + b + c + d.
Domestic producers gain area a: extra producer surplus from the higher price.
The government gains area c: the tariff revenue.
Areas b and d are lost to everyone. b is a production loss: domestic firms now produce units that could have been imported more cheaply. d is a consumption loss: consumers no longer buy units they valued above the world price.
Sort these
A tariff is placed on imported steel. Sort each group by whether it gains or loses.
Groups: Gains, Loses.
- Workers at local steel mills
- Local steel makers
- The government
- Local carmakers that use steel as an input
- Households buying goods made of steel
- Foreign steel exporters
Show the answer
Gains
- Workers at local steel mills Higher local output protects their jobs in the short run.
- Local steel makers They sell more steel at the higher domestic price, so their producer surplus rises.
- The government It collects the tariff on every tonne of steel still imported.
Loses
- Local carmakers that use steel as an input Their costs rise, which makes their cars less competitive at home and abroad.
- Households buying goods made of steel They pay a higher price and buy less, so consumer surplus falls.
- Foreign steel exporters They sell less steel into this market because of the tariff.
- Consumers
- Lose a + b + c + d.
- Producers
- Gain a.
- Government
- Gains c.
- Deadweight loss
- b + d.
| Group | Change | Area |
|---|---|---|
| Consumers | -$110 | a + b + c + d |
| Producers | +$50 | a |
| Government | +$40 | c |
| Country | -$20 | b + d |
Worked example: Where the consumer loss goes
In the $1 tariff example, consumer surplus falls by $110 a day.
- Producer surplus rises by $50 (area a).
- Tariff revenue is $40 (area c).
- That leaves $110 - $50 - $40 = $20 of deadweight loss.
- It splits into two triangles of $10 each: the production loss (b) and the consumption loss (d).
Watch out for this
Tariff revenue is a gain on top of the producers' gain, so the country is better off.
Both gains come out of consumers' losses, which are larger. The country loses the deadweight triangles.
Check your understanding
A tariff causes consumer surplus to fall by $200, producer surplus to rise by $80 and tariff revenue of $90. What is the deadweight loss?
- $30.
- $0, because the gains and losses cancel out.
- $170.
Show the answer
$30.
Right. $200 - $80 - $90 = $30.