Net loss in surplus = ② + ④The overall effect of the tariff is therefore to create a deadweight loss to
the domestic economy equal to areas ② plus ④. Domestic consumers are
worse off, while domestic firms and taxpayers are better off. But the net
effect is a loss of surplus for the economy as a whole. This is the overall
cost of levying a tariff.
A tariff imposes costs on domestic consumers, generates benefits for domestic producers, and
generates revenue for the government. But the overall net effect is negative; a tariff generates
a deadweight loss for the economy.Note that a domestic tariff also creates a loss for the countries from which
we import. For example, since a Canadian tariff on imported machinery
leads to a reduction in the volume of these imports, there is less Canadian
demand for machinery from the exporting countries. This reduction in
demand generates a loss in income for foreign producers and their
workers. Tariffs therefore create losses for both importing and exporting
countries.