Consumer losses exceed domestic producer gains and government receipts in the simple model.
A tariff raises the domestic price, reducing consumer surplus and increasing domestic producer surplus. Government receives the per-unit tariff multiplied by imports that still enter, not by total domestic consumption. Part of the consumer loss is transferred to producers and government. The remaining national welfare loss has two components: extra domestic output costs more to produce than importing it at the world price, and some consumption worth more than its import cost is forgone. For straight-line curves these are two triangles. This conclusion assumes a small country, competition and no externality or other offsetting benefit. A broader policy judgement must specify any additional benefit, real implementation costs and foreign responses rather than silently adding them to this diagram.
- Surplus
- Consumer surplus (CS) is willingness to pay above the price paid. Producer surplus (PS) is receipts above the supply curve's cost of providing each unit. On the diagram these are areas below demand/above price and above supply/below price.
- Revenue and transfers
- Government revenue is the tariff per unit multiplied by remaining imports. Producer gains and government receipts offset part of consumers' loss: they are transfers within the country, not newly created benefits.
- Deadweight loss
- Deadweight loss is the net benefit lost after transfers are counted. Here it comes from higher-cost domestic production and beneficial consumption that no longer occurs. With straight lines, each loss triangle is half x quantity change x the domestic price rise above the world price.
Read the areas as economic mechanisms
Calculating surplus areas
For these straight-line curves, triangle area is half x base x height. The base is units traded per day; the height is dollars per unit. Demand meets the price axis at 10 and supply at 2. At price 4, the consumer height is 10 - 4 = 6; the producer height is 4 - 2 = 2. Areas are dollars per day.
Producer transfer
Domestic producers receive more on existing output and expand production. Their surplus gain is not an extra national gain on top of the matching consumer loss.
Revenue rectangle
Height is tariff per unit and width is remaining imports. When imports stop, the rectangle disappears.
Production triangle
Extra domestic units use resources costing more than the world supply price.
Consumption triangle
Forgone units had willingness to pay above the world supply price. Net gains from consuming them are lost.
National scope
The small-country calculation values domestic consumers, producers and government. It does not include a world-price gain or an unmodelled strategic benefit.
| Tariff/unit | Consumer surplus | Producer surplus | Government receipts | Loss versus free trade |
|---|---|---|---|---|
| 0 | 360 | 40 | 0 | 0 |
| 0.5 | 302.5 | 62.5 | 30 | 5 |
| 1 | 250 | 90 | 40 | 20 |
| 1.5 | 202.5 | 122.5 | 30 | 45 |
| 2 | 160 | 160 | 0 | 80 |
Worked example: Where the consumer loss goes
Use P = 10 - 0.05 Q, P = 2 + 0.05 Q and world price 4. A tariff 1 raises domestic price to 5, Qs from 40 to 60 and lowers Qd from 120 to 100. Imports become 40.
- Consumer surplus falls from 0.5 x 120 x (10 - 4) = 360 to 0.5 x 100 x (10 - 5) = 250: a loss of 110 dollars per day.
- Producer surplus rises from 0.5 x 40 x (4 - 2) = 40 to 0.5 x 60 x (5 - 2) = 90: a gain of 50 dollars per day. Government receives 1 x 40 = 40 dollars per day on imports.
- The domestic net change is -110 + 50 + 40 = -20. The revenue rectangle is a transfer, not an additional deadweight loss.
- Production loss is 0.5 x 20 x 1 = 10 and consumption loss is also 10. With tariff 2, imports and tariff revenue are zero while total loss reaches 80.
Watch out for this
Government tariff revenue equals the tariff times all domestic sales.
Only taxable imports generate tariff revenue. Domestically produced units are outside this tariff base.
Check your understanding
Consumers lose 150, domestic producers gain 60 and government receives 50. With no other effects, what is the national welfare change?
- A loss of 40.
- A gain of 110.
- A loss of 150.