Jim Whitney
Trade restrictions: the optimal tariff
    Example: Consider the trade market for small trucks exported from Japan (J) to the U.S. (U), illustrated in the trade market diagram below:
 
 
   A. Basic geometry: Suppose the U.S. imposes a $2,000 tariff on small trucks imported from Japan.
    Step 1: Shift Sxj up by the amount of the tariff (tar); label your new curve Sx+tar.
    Step 2: Use Sx+tar to find the new equilibrium quantity traded (Q').
    Step 3: Go up to the import demand curve at Q' to find the new price in the U.S. (Pu')
    Step 4: Go up to the export supply curve at Q' to find the the new price in Japan (Pj').
    Step 5: Indicate where the U.S. tariff revenue shows up in the diagram.

    B. Analysis: Comparing the tariff to free trade.
    1. Price effects:
    The "international price" (P*) is the price which the importing country actually pays to the exporting country.
    How high is P* with free trade? ______   With the U.S. tariff? ______
    Does the tariff raise or lower the U.S. terms of trade? ______
    How did you decide?
 
 

    2. Welfare effects:

  --Area-- Amount Direction of change 
in general (+,-,0,?)
Dexporter welfare:      
Dimporter welfare:      
Dglobal welfare: