A tariff is like a gatekeeper who charges a fee on foreign goods entering a country. Think of it as a tax on imported products, aiming to protect local producers. Sounds complicated? Fear not! Let's break it down using real-life examples and fun analysis.

Types of Tariffs

• Specific Tariff: A fixed amount per product (like $5 on each toy).
• Ad Valorem Tariff: A percentage of the product's value (like the 25% tariff the USA placed on $250 billion of Chinese products in May 2019).

Imagine a fictional small country. Here's how a tariff on corn affects this land of corn-lover

• Without Tariff

  • World Price (Pw): The price at which corn is sold internationally.
  • Domestic Production (Q1): The amount of corn produced locally.
  • Domestic Consumption (Q2): The amount of corn eaten by the locals.
  • Imports (Q2 - Q1): The amount of corn imported.
  • Expenses & Revenues: (See the text for a deeper dive into areas H, F, J, G!)

• With Tariff

  • New Price (P' = Pw + t): The price goes up by the tariff amount.
  • More Production (Q3): Local farmers produce more corn.
  • Less Consumption (Q4): Locals eat less corn (too pricey!).
  • Less Imports (Q4 - Q3): Imports shrink.
  • Government Revenue: The tariff collected helps in building schools or roads.

• Consumer Surplus: Consumers lose. They pay more and eat less corn. Their loss is shown by areas (1 + 2 + 3 + 4).

• Producer Surplus: Local farmers win. They sell more at a higher price. Gain equals area (1).

• Government Gain: The government gets the tariff money, shown by area (3), which can be spent on public services.

• Welfare Loss: Society loses value in areas (2) and (4), known as production and consumption inefficiency.

  • Production Inefficiency (Area 2): Producing corn domestically costs more than importing it. It's like baking bread at home for $5 when it could be bought for $3 from the store.
  • Consumption Inefficiency (Area 4): People miss out on corn they value more than the world price. Imagine wanting a delicious candy bar for $2, but due to a tariff, it costs $3, so you skip it.