Trade & Open Economy · intro
What moves on the Tariffs & Protection (Small Open Economy) diagram
A tarifftariffA tax on imports, raising their domestic price. raises the domestic price above the world price, cutting consumption, expanding higher-cost domestic production, shrinking imports, and creating deadweight lossdeadweight lossValue that simply vanishes when a market is pushed away from its efficient quantity, trades worth making that don't happen. on both the consumption and production margins.
Under free trade the economy buys at the flat world price: consumers buy a lot, local firms supply a little, imports fill the gap.
A tarifftariffA tax on imports, raising their domestic price. lifts the price line by the duty.
Consumers buy less at the higher price; protected local firms expand along their supply curve.
The import gap shrinks from both sides, and the lost consumer surplusconsumer surplusThe gap between what buyers would have paid and what they actually paid. exceeds what firms and the government gain: two deadweight triangles.
Examiners ask this as: tariff, protectionism, import tax, trade war, steel tariff.
Other scenarios on Tariffs & Protection (Small Open Economy)