Please explain answer, thank you. 21) Which of the following statements is true?
ID: 1115378 • Letter: P
Question
Please explain answer, thank you.21) Which of the following statements is true? A) Domestic producers always gain from any type of tariff. B) The producer surplus gained from an import tariff is always equal to the consumer surplus lost. C) As a result of a tariff, producer surplus will increase more than consumers surplus declines. D) Consumer surplus is the rectangular area above the demand curve and below the equilibrium price. E) Tariffs improve the welfare of society because the gain in producer surplus is larger than the loss of consumer surplus.
Explanation / Answer
First statement is correct.
Tariff increases the price of product that is imported which means imports are reduced and hence consumers are bound to purchase from the domestic producers at a higher price. This suggest that any kind of tariff that increases the price of imported goods will increase the producer surplus. Producer surplus increases while consumer surplus funds as a result of tariff. But the loss in consumer surplus is more than the gain in producer surplus. Also the net effect on the Welfare of a nation is ambiguous in most cases because there are distortionary losses as well. Consumer surplus is not a rectangular area but a triangular area for Linear demand curve.