5 Steps to a 5 AP Macroeconomics 2019

170 ❯ Step 4. Review the Knowledge You Need to Score High

Tariffs

In general, there are two types of tariffs. A revenue tariff is an excise tax levied on goods that

are not produced in the domestic market. For example, the United States does not produce

bananas. If a revenue tariff were levied on bananas, it would not be a serious impediment to

trade, and it would raise a little revenue for the government. A protective tariff is an excise

tax levied on a good that is produced in the domestic market. Though this tariff also raises

revenue, the purpose of this tariff, as the name suggests, is to protect the domestic industry

from global competition by increasing the price of foreign products.

Example:

The domestic supply and demand for steel is pictured in Figure 12.9. The domes-

tic price is $100 per ton and the equilibrium quantity of domestic steel is

10 million tons. Maybe other nations can produce steel at lower cost. As a

result, in the competitive world market, the price is $80 per ton. At that price,

the United States would demand 12 million tons, but only produce eight

million tons and so four million tons are imported. It is important to see that

in the competitive (free trade) world market, consumer surplus is maximized

and no deadweight loss exists. You can see the consumer surplus as the triangle

below the demand curve and above the $80 world price.

If the steel industry is successful in getting a protective tariff passed through

Congress, the world price rises by $10, increasing the quantity of domestic steel

supplied, reducing the amount of steel imported from four million to two mil-

lion tons. A higher price and lower consumption reduces the area of consumer

surplus and creates deadweight loss.

Economic Effects of the Tariff

•   Consumers pay higher prices and consume less steel. If you are building airplanes or door

hinges, you have seen an increase in your costs.

•   Consumer surplus has been lost.

•   Domestic producers increase output. Domestic steel firms are not subject to the tariff,

so they can sell more steel at the price of $90 than they could at $80.

•   Declining imports. Fewer tons of imported steel arrive in the United States.

Sd

Dd

Quantity of Steel

(millions of tons)

$ per ton

Pd = $1 00

8

Pw = $80

10 12

imports = 4

Figure 12.9

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