CHAPTER • The Analysis of Competitive Markets 341 What about producers? Output is now higher (Q0 instead of Qs) and is sold at a higher price (P0 instead of Pw) Producer surplus therefore increases by the amount of trapezoid A: ⌬PS = A The change in total surplus, ⌬CS + ⌬PS, is therefore −B − C Again, there is a deadweight loss—consumers lose more than producers gain Imports could also be reduced to zero by imposing a sufficiently large tariff The tariff would have to be equal to or greater than the difference between P0 and Pw With a tariff of this size, there will be no imports and, therefore, no government revenue from tariff collections, so the effect on consumers and producers would be the same as with a quota More often, government policy is designed to reduce but not eliminate imports Again, this can be done with either a tariff or a quota, as Figure 9.15 shows Under free trade, the domestic price will equal the world price Pw, and imports will be Qd − Qs Now suppose that a tariff of T dollars per unit is imposed on imports Then the domestic price will rise to P* (the world price plus the tariff); domestic production will rise and domestic consumption will fall In Figure 9.15, this tariff leads to a change of consumer surplus given by ⌬CS = -A - B - C - D The change in producer surplus is again ⌬PS = A Finally, the government will collect revenue in the amount of the tariff times the quantity of imports, which is rectangle D The total change in welfare, ⌬CS plus ⌬PS plus the revenue to the government, is therefore −A − B − C − D ϩ A ϩ D ϭ −B − C Triangles B and C again represent the deadweight loss from restricting Price S F IGURE 9.15 IMPORT TARIFF OR QUOTA (GENERAL CASE) P* When imports are reduced, the domestic price is increased from Pw to P* This can be achieved by a quota, or by a tariff T ϭ P* − Pw Trapezoid A is again the gain to domestic producers The loss to consumers is A ϩ B ϩ C ϩ D If a tariff is used, the government gains D, the revenue from the tariff, so the net domestic loss is B ϩ C If a quota is used instead, rectangle D becomes part of the profits of foreign producers, and the net domestic loss is B ϩ C ϩ D Quota T A D B C Pw D Qs Q's Q'd Qd Quantity