Tariffs & Protection (Small Open Economy)

Definition

For a small open economy, the world price rules the market as a horizontal line. A tariff lifts that line: consumers pay more and buy less, protected domestic firms expand, imports shrink from both sides, and two deadweight-loss triangles appear.

P_domestic = P_world + tariff ; imports = Qd(P) - Qs(P)

The intuition

The tariff transfers surplus from consumers to producers and the government, but the corners of the transfer leak away entirely: consumers who stop buying and high-cost domestic production that replaces cheap imports. That leak, the two triangles, is why economists across the spectrum score tariffs as costly protection.

Exam tip

Shade all four regions after a tariff: producer gain, government revenue, and the TWO deadweight triangles (production and consumption). Forgetting the consumption triangle loses the mark.