Question: Consider a small country applying a tariff t to imports of a good like that represented in Figure.
a. Suppose that the country decides to reduce its tariff to t′. Redraw the graphs for the Home and import markets and illustrate this change. What happens to the quantity and price of goods produced at Home? What happens to the quantity of imports?
b. Are there gains or losses to domestic consumer surplus due to the reduction in tariff? Are there gains or losses to domestic producer surplus due to the reduction in tariff? How is government revenue affected by the policy change? Illustrate these on your graphs.
c. What is the overall gain or loss in welfare due to the policy change?
