Trade and tariffs | APⓇ Microeconomics | Khan Academy

Summary

The video explains how trade impacts the total economic surplus in a market and introduces the concept of tariffs. Initially, it discusses how opening a market to global trade, especially at a lower world price, benefits consumers by increasing total economic surplus, while producers may lose some surplus. The introduction of tariffs, however, decreases consumer surplus, raises domestic producer surplus, generates government revenue, and leads to deadweight loss. The video also briefly touches on quotas as another method governments use to limit imports and affect economic surplus.

Takeaways

• 📈 Trade increases total economic surplus by expanding consumer and producer benefits.
• 🌍 Opening a market to a lower world price benefits consumers but reduces producer surplus.
• 💰 Consumer surplus increases significantly with lower prices from international trade.
• 📉 Producers face losses when the world price is lower than the domestic equilibrium price.
• 💸 A tariff is a per-unit charge on imports often aimed at protecting domestic industries.
• ⚖️ Tariffs increase the domestic price of goods, reducing consumer surplus but increasing producer surplus.
• 🏛️ Tariff revenue goes to the government, but it also creates deadweight loss in the economy.
• ❌ Deadweight loss occurs due to reduced trade and inefficiencies introduced by tariffs.
• 📊 Total economic surplus decreases when tariffs are introduced, despite government revenue gains.
• 🚫 Quotas, like tariffs, limit imports and can further affect economic surplus and market dynamics.

Q & A

What is the effect of opening a market to international trade on the total economic surplus?

Opening a market to international trade typically increases the total economic surplus. This happens because consumers gain access to goods at lower world prices, increasing consumer surplus, even though producer surplus may decrease.

How does a tariff affect consumer and producer surplus?

A tariff reduces consumer surplus because it raises the price consumers have to pay. It increases producer surplus by protecting domestic producers from cheaper foreign goods, allowing them to sell at higher prices.

What is the purpose of a tariff in the context of the sugar market example?

The tariff is intended to protect domestic sugar producers who are hurt by the lower world prices. By imposing a 50-cent tariff, the government helps domestic producers by making imported sugar more expensive.

What happens to government revenue when a tariff is imposed?

When a tariff is imposed, the government generates revenue from the tariff. The revenue is equal to the amount of the tariff multiplied by the quantity of imported goods. In the sugar example, this would be the 50 cents per pound times the imported quantity of sugar.

What is deadweight loss, and how does it arise in the case of tariffs?

Deadweight loss refers to the lost economic efficiency when the total surplus is reduced due to market distortions, like tariffs. In the case of tariffs, deadweight loss occurs because some of the surplus that could have benefited consumers or producers is neither captured by them nor by the government, leading to inefficiencies.

How does the world price of sugar impact the market when it is lower than the domestic price?

When the world price of sugar is lower than the domestic price, consumers in the domestic market benefit by purchasing sugar at a lower cost, increasing consumer surplus. However, domestic producers lose some surplus because they have to compete with cheaper imported sugar.

How does the quantity of sugar consumed change when the market opens to world prices?

When the market opens to world prices, the quantity of sugar consumed increases because the price is lower. Consumers are willing to buy more sugar at the reduced price, driving up demand.

What happens to the quantity of sugar consumed when a tariff is imposed?

When a tariff is imposed, the quantity of sugar consumed decreases compared to the free trade scenario because the price for consumers rises. However, it remains higher than when the market was completely isolated.

How does a tariff affect total economic surplus?

A tariff reduces total economic surplus. Although it benefits domestic producers and generates government revenue, the overall surplus decreases because part of the surplus becomes deadweight loss, and consumers pay higher prices.

What is the difference between a tariff and a quota in terms of market impact?

A tariff increases the price of imported goods by adding a charge per unit, while a quota directly limits the quantity of imports. Both reduce consumer surplus, but a quota directly caps the volume of trade, whereas a tariff allows more flexibility in the amount imported depending on how much consumers are willing to pay.