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Price-Quantity Effects of Protective Tariffs Draw a domestic supply and demand diagrams for a product in which the United States does not have a comparative advantage
Price-Quantity Effects of Protective Tariffs
Draw a domestic supply and demand diagrams for a product in which the United States does not have a comparative advantage. What impact do foreign imports have on domestic price and quantity? On your diagram show a protective tariff that eliminates approximately one-half of the assumed imports. What are the price-quantity effects of this tariff on (a) domestic consumers, (b) domestic product?
Expert Solution
Because the United States does not have a comparative advantage in this product the world price Pc is below the domestic price of Pa. Imports reduce the domestic price which increases consumption from nontrade Qc to Qe and decreases domestic production from Qc to Qa. (a) With the tariff of PbPc domestic consumers are harmed by increasing price from Pc to Pb and decreasing consumption from Qe to Qd;
(b) With the tariff of PbPc domestic producers are helped through the increase in price from Pw to Pt and the expansion of domestic production from Qa to Qb.
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