The graph above shows a small country that can import at the world price of Pw. Suppose that the government imposes a tariff of $T per unit (and suppose that this does not raise the domestic price so much that there will be no trade. Use the graph above to illustrate the effects of the tariff. Show the new areas of consumer surplus, producer surplus, and government revenue, and the deadweight

losses due to the tariff. Who wins and who loses from the tariff?

What will be an ideal response?

See Figure 6.3 in the text. Consumer surplus decreases, producer surplus and government revenue increase, and total surplus falls, since there are deadweight losses. Consumers lose, producers and the government win, and the country as a whole loses (since there are deadweight losses).