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March 27, 2017

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Using a diagram. What is the value of the gain to the domestic consumers due to the removal of the tariff in a large country?

  • Economics - ,

    Let me answer the small country case first (where the country has no impact on world prices). Then I'll expand the analysis to a large country.

    Draw a demand curve and a world price line (Pw). Now then assume there is a tarriff T. Final price paid by consumers is Pw+T = Pt. Draw this flat line. Where this line crosses demand give the equilibrium quantity.

    Now remove the tarrif. The new equilibrium Q is where Pw crosses the demand line. The increase to consumer surplus is area between Pw and Pt and below demand.

    Now then for a large country, with the removal of the tariff, the WORLD market will see an apparent increase in demand. World price will go up. So, on your graph, increase Pw to Pw' (Be sure Pw' is less than Pt).

    Take it from here.

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