Trade restrictions: the optimal tariff

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 dotted-line 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 "trade price" (P_tr) is the price which the importing country actually pays to the exporting country.
How high is P_tr with free trade? ______ With the U.S. tariff? ______

2. Welfare effects:

	a	b	c	d	e	f
		Area(s) in diagram		Change resulting from the tariff
		Free trade	Import tariff	Area(s) in diagram	Amount ($)	Direction of change in general (h,i,0,?)
1	Ordinary exporter gains from trade
2	Ordinary importer gains from trade
3	Tariff revenue
4	Total importer gains from trade
5	Total global gains from trade

Example: Consider the trade market for small trucks exported from Japan (J) to the U.S. (U), illustrated in the trade-market diagram below:

	Values of the areas in diagram: A=15 B=30 C=15 D=30 E=15 F=15