consume less of the product because its price rises, and second, they pay
a higher price for the amount they do consume. This extra spending ends
up in two places: The extra that is paid on all units produced at home
goes to domestic producers, and the extra that is paid on units still
imported goes to the government as tariff revenue.
The overall loss to the domestic economy from levying a tariff is best seen
in terms of the changes in consumer and producer surplus. Before the
tariff, consumer surplus was equal to the entire area below the demand
curve and above the price line at.
After the tariff, the price increase leads to less consumption and less
consumer surplus. The loss of consumer surplus is the sum of the areas
①, ②, ③, and ④ in Figure 33-1. As domestic producers respond to the
higher domestic price by increasing their production and sales, they earn
more producer surplus, equal to area ①. Finally, the taxpayers gain the
tariff revenue equal to area ③. This is simply a redistribution of surplus
away from consumers toward taxpayers. In summary:
Loss of consumer surplus = ① + ② + ③ + ④Gain of producer surplus = ①Gain of tariff revenue = ③pw