Economics - Tariffs

[helkit98]

Not sure how to do this question

[hermansia12]

Hi there,

For this question, since the tariff is $10 more than the world price (i.e $20 on market price) then the economy is in disequilibrium as there is an overdemand of 20 million. Therefore the tariff revenue= amount over-demand* tariff  = 20 million *10 = $200 million therefore the answer is B.

[helkit98]

Would we need to take into account the initial $15 tariff to calculate the change?

[RuiAce]

Would we need to take into account the initial $15 tariff to calculate the change?

Yes, however:

Note that the initial tariff of $15 forces the price up to $25. This is the point of market equilibrium in the closed economy.

Hence, the market will be supplying all the stuff by itself. At this point, the government effectively generates $0 tariff revenue.

[helkit98]

Makes much more sense, thank you so much!

This last part to the same question is also confusing

[hermansia12]

Makes much more sense, thank you so much!

This last part to the same question is also confusing

These questions are actually answered on the question thread just last night. You can find the answers here:
Economics Question Thread on page 11

The answer to this question is that with the tariff, the market price is at $15 with the overdemand at 40 million. So to have the same effect, we have to constrain 40 million of the good. This is equivalent to moving from the $25 (equilibrium) amount of 50 to 30 in supply and 50 to 70 in demand. This makes the market price $15 i.e $5 tariff so the answer is C