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Before
In the beginning the US does not have a tariff on steel.
Since there is no tariff, the US price of steel is the same
After
Now the US imposes a $5 per pound tax on imported
steel.
Because of the tariff, the US price of steel (inclusive of
the $5 tariff) is going to be different from the world
price of steel (exclusive of the tariff).
tariff?
It will be equal to the $8 world price of steel plus the $5
tariff.
So the US price of steel (inclusive of the tariff) will be
$13.
steel?
Where do these 110 pounds come from?
Will US producers continue to supply 20 pounds?
No, US price is higher at $13 instead of at $9 so US
producers will supply more at the higher price.
Assume that US producers will now supply 50 pounds at
the higher price of $13 (compared to 20 pounds at the lower
price of $9).
The remaining 60 pounds (110 minus 50) will be imported.
After
$5 per pound tariff on steel
Table 1
20 pounds
supplied by US
producers
Table 2
Additional 30
pounds now
supplied by US
producers when
there is a tariff
Table 3
60 pounds
imported when
there is a tariff
Table 4
US users cut back
by 10 pounds
when there is a
tariff
Table 1
The 20 pounds of steel supplied by US producers both before and after the
tariff
Before
After
Gain
(after minus before)
Loss
(after minus before)
Net effect
(+ is net
gain; - is net
loss)
US producers
Sold at $9
per pound
Sold at $13
per pound
Revenue from 20
pounds of steel at
$13 per pound
minus revenue from
20 pounds of steel
at $9 per pound = ?
Cost of producing
20 pounds when
price is $13 minus
cost of producing
the same 20 pounds
when price is $9 = ?
US users
Bought at
$9 per
pound
Bought at
$13 per
pound
Value of 20 pounds
of steel to users
when price is $13
minus value of the
same 20 pounds of
steel when price is
$9 = ?
Payment for 20
pounds of steel at
$13 per pound
minus payment for
20 pounds of steel
at $9 per pound = ?
US govt
Not
involved
Not
involved
US as a whole
Table 2
The 30 pounds increase in production by US producers due to the tariff
Before
After
Gain
(after minus before)
Loss
(after minus before)
Net effect
(+ is net gain;
- is net loss)
US producers
Not
produced
Revenue from 30
pounds of steel at $13
per pound minus
revenue from zero
pounds of steel at $9
per pound = ?
Estimated cost of
producing 1 pound
of steel times 30
pounds = ?
See Box A
explanation.
US users
Bought at
$9 per
pound
from
abroad
Bought at $13
per pound from
US producers
Value of 30 pounds
of steel to users
when price is $13
minus value of the
same 30 pounds of
steel when price is $9
=?
Payment for 30
pounds of steel at $13
per pound minus
payment for 30
pounds of steel at $9
per pound = ?
US govt
Not
involved
because
there was
no tariff
Not involved
because these
30 pounds are
not imports
US as a
whole
Box A explanation
The loss in Box A is the cost of producing 30 pounds of
steel.
Do we know the cost of producing 30 pounds of steel?
We dont know the exact cost.
However, we can form a reasonable estimate based on
two observations.
Box B explanation
In Box B we see that the US as a whole has a loss of $?.
Here is an intuitive explanation of this loss.
Before the tariff, the US was paying $9 per pound to import
distortion.
With a tariff, the US is over-producing steel by 30
pounds. Those 30 pounds should have been imported
at $9 per pounds instead of being produced at home at
$? per pounds. We call this over-production a
production distortion.
angle) triangle.
Height is
$?
Base is
30 pounds
the tariff.
The height is the increase in US price of steel due to the
tariff (from $9 to $13).
The area of this triangle is base times height divided by 2 =
30 times ? divided by 2 = ?
So the deadweight loss is also called a deadweight loss
triangle.
Table 3
The 60 pounds of steel imported by the US after the tariff
Before
After
Gain
(after minus before)
Loss
(after minus before)
Net effect
(+ is net
gain; - is net
loss)
US producers
Not
involved
Not
involved
US users
Bought at
$9 per
pound
from
abroad
Bought at
$13 per
pound
from
abroad
Value of 60 pounds
of steel to users
when price is $13
minus value of the
same 60 pounds of
steel when price is
$9 = ?
Payment for 60
pounds of steel at
$13 per pound
minus payment for
60 pounds of steel
at $9 per pound = ?
US govt
Not
involved
because
there was
no tariff
$5 per
pound
tariff
US as a whole
of tariff revenue.
However, these $? does not represent a net gain to the
US from the 60 pounds of steel import.
This is because US users pay $? more for these 60
pounds of steel than before the tariff.
So the net gain to the US from these 60 pounds is $?
($? gain to US government minus $? loss to US users).
Table 4
The 10 pounds decrease in purchase by US users of steel when price went
from $9 to $13 per pound due to the tariff
Before
After
Gain
(after minus before)
Loss
(after minus before)
Net effect
(+ is net
gain; - is net
loss)
US producers
Not
involved
Not
involved
US users
Bought at
$9 per
pound
Not bought
at $13 per
pound
Expenditure went
down by $9 per
pound. Total saving
is $9 time 10 = $?
Estimated value of 1
pound of steel times
10 pounds = ?
See Box C
explanation.
US govt
Not
involved
because
there was
no tariff
Not
involved
because
these 5
pounds are
no longer
imported
US as a whole
?
See Box D
explanation.
Box C explanation
US users of steel cut back on their purchase of steel by
price is higher at $13 after the tariff. What does this tell
you about the maximum (average) value of steel?
The (average) value is at most $13.
Box D explanation
In Box D we see that the US as a whole has a loss of $?.
Here is an intuitive explanation of this loss.
Before the tariff, the US was buying steel at $9 per pound but the
consumption distortion.
With a tariff, the US is under-using steel by 10 pounds.
Those 10 pounds should have been imported at $9 per
pounds to generate $11 per pound in value. We call this
under-consumption a consumption distortion.
angle) triangle.
Height is
$?
Base is 10 pounds
tariff.
The height is the increase in US price of steel due to the
tariff (from $9 to $13).
The area of this triangle is base times height divided by 2 =
10 times ? divided by 2 = ?
So the deadweight loss is also called a deadweight loss
triangle.
Table 1
Table 2
Table 3
Table 4