States whe SD Sp is the domestic supply curve and Dp is the

Last updated: 10/7/2023

States whe SD Sp is the domestic supply curve and Dp is the domestic demand curve Assume the United States is considered a large nation meaning that changes in the quantity of its imports due to a tariff influence the world price of oil Under free trade the United States faced a total supply schedule of Sp w which shows the quantity of oil that both domestic and foreign producers together offer domestic consumers In this case the free trade equilibrium black plus occurs at a price of 240 per barrel of oil and a quantity of 9 million barrels At this price the United States imports 6 million barrels of oil Suppose the U S government imposes a 60 per barrel tariff on oil imports On the following graph use the tan line rectangle symbol to draw the new total supply schedule including the tariff SD w T Then use the grey point star symbol to indicate the new market equilibrium price and quantity as a result of the tariff PRICE Dollars per barrel 420 390 360 330 300 270 240 210 180 150 120 DD 0 1 D W 2 3 4 5 6 7 8 QUANTITY OF OIL Millions of barrels Domestic revenue effect Terms of trade effect 1 9 O True So 10 10 D W T Equilibrium Under Tariff Domestic Revenue Effect Terms of Trade Effect The tarrif s revenue effect the import tariff multiplied by the quantity of oil imported can be broken into two components Deadweight Loss On the previous graph use the green rectangle triangle symbols to indicate the domestic revenue effect of the tariff Then use the purple rectangle diamond symbols to indicate the terms of trade effect Now consider the effect of the tariff on welfare in the United States On the previous graph use the black triangles plus symbols to indicate the deadweight loss caused by the tariff True or False National welfare in the United States increases as a result of a 60 per barrel tariff on oil imports