Small Country Tariff
In the U.S., supply and demand for a particular good are given by the equations:
QS = 10P
QD = 105 - 5P
Assume the U.S. is a small country in the market for this good. Further, assume that in the rest of the world (ROW), the market price for this good (PROW) is $5.
1. Before trade opens up, what are the values of the equilibrium price and quantity in the U.S.?
2. If trade opens up, what will be the quantity of U.S. imports?
3. Suppose the U.S. puts a $1 tariff on this good. What will be the quantity of U.S. imports now? [Hint:What will be the relationship between P and PROW after the tariff? What, if anything, will happen to PROW after the U.S. imposes this tariff? Remember: the U.S. is a small country.]
4. What is the total dollar value of the change in welfare in the United States caused by the tariff? State whether the U.S. enjoys a welfare gain or suffers a welfare loss (a deadweight loss) from the tariff. [Hint: draw a rough graph, put some numbers on it based on your answers above and the supply and demand equations, and figure out some area(s)]
5. What is total U.S. government revenue from the tariff?