A tariff imposes a deadweight loss for the importing country. Before the
tariff, the price in the domestic economy is the world price,. Imports
are. With a tariff of per unit, the domestic price rises to.
Domestic consumption falls to , and consumer surplus falls by areas ①
② + ③ + ④. Domestic production rises to and producer surplus
increases by area ①. Imports fall to , and the government collects
tariff revenue equal to area ③. The sum of areas ② and ④ represents the
deadweight loss of the tariff.
The initial effect of the tariff is to raise the domestic price of the imported
product above its world price by the amount of the tariff. Imports fall. The
price received on domestically produced units rises, as does the quantity
produced domestically. On both counts, domestic producers earn more.
However, the cost of producing the extra production at home exceeds the
price at which it could be purchased on the world market. Thus, the
benefit to domestic producers comes at the expense of domestic
consumers. Indeed, domestic consumers lose on two counts: First, they
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