Calculating Tariffs (Past HSC Question) (1 Viewer)

[swagmeister]

So I thought I had a good understand of calculations from the diagrams for protectionist policies, but then I tried to do a past HSC question (2013 #20):


Domestic output is the easy bit - it is going from 100 to 90 so decreasing. Then I got stuck on the tariff revenue part - I know that government revenue is calculated by multiplying the size of the tariff by the amount of imports. So before the tariff is lowered it should be 10 x (120-80) right so 400 then after the tariff is reduced it should be 5 x (110-90) so 100 which is a decrease.

But that is not the answer it should be D meaning domestic output decreases yup but tariff revenue increases. Now the one thing that I realised is that as a result of the tariff which pushes the price to P30 it is in a point of equilibrium and Q is 100. When it is equilibrium, I am guessing that you assume that all 100 of Q is supplied by domestic producers because they are willing to? Is that correct? It seems a bit weird to me because it could be a mix of both...

 

[Tsonga]

With no tariff, the price for the good is $20. With the $10 tariff, that price rises to $30. At this point there are no imports as you said, domestic demand and supply are in equilibrium. Therefore, when the tariff is reduced to $5, the price of the good becomes $25 and domestic output reduces and at this price there are 20 (110-90) imports, making the government revenue $100. Government revenue changes from $0 to $100.
I think you just got confused with the starting price, the tariff is added onto the free trade price making the good cost $30 after the first tariff is implemented.

 

[sy37]

Tariff revenue goes directly to the government. If they decrease the tariff price, all things being equal, they will lose revenue. This eliminates A, D.

Decreasing tariffs will increase the amount of imports coming into the country. If the amount of imports increase, the market will be flooded with more products and the competitiveness of our producers diminished as they are not artificially boosted per se. Hence, domestic output contracts.

The answer is B.

 

[turnerloos]

Tariff revenue goes directly to the government. If they decrease the tariff price, all things being equal, they will lose revenue. This eliminates A, D.

Decreasing tariffs will increase the amount of imports coming into the country. If the amount of imports increase, the market will be flooded with more products and the competitiveness of our producers diminished as they are not artificially boosted per se. Hence, domestic output contracts.

The answer is B.

It's D m8. The graph depicts that it's currently in equilibrium meaning that there is no tax revenue gained from the tariff. So when the govt decreases tariff price to $5, tax revenue is then calculated via the area of the rectangle (i.e. 20x5). So tax revenue increases and since u know that domestic output falls, the answer is D.

 

[Evertone]

I'm not sure if I'm simplifying this so much that I'm incorrect... but a government does not raise any revenue if a particular point has no 'square' to, so speak, colour in as revenue... ? Obviously at 25 there's room to move from 25 / 90-110.

 

[sy37]

I'm not sure if I'm simplifying this so much that I'm incorrect... but a government does not raise any revenue if a particular point has no 'square' to, so speak, colour in as revenue... ? Obviously at 25 there's room to move from 25 / 90-110.

Sorry I read your question wrong - the answer is indeed D.

Yes what you are saying is right. No square = no income if thats how you'd like to think of it. That was quite a deceptive question.