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9708 · 6.2

Protectionism — practice questions

Practice and worked examples for 9708 Protectionism. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

The world price of steel is $400/tonne. Domestic demand is Qd = 100 − 0.1P and domestic supply is Qs = 0.05P (P in $, Q in million tonnes).

(a) Find equilibrium price and quantity with free trade. (b) A $50/tonne tariff is imposed. Find the new domestic price and import quantity. (c) Identify who gains and who loses.

Show solution outline

(a) Free trade At Pw = $400: Qd = 100 − 0.1(400) = 60m tonnes; Qs = 0.05(400) = 20m tonnes Imports = Qd − Qs = 60 − 20 = 40m tonnes

(b) With $50 tariff Domestic price rises to Pw + tariff = 400+400 + 50 = $450/tonne Qd = 100 − 0.1(450) = 55m tonnes Qs = 0.05(450) = 22.5m tonnes Imports = 55 − 22.5 = 32.5m tonnes (imports fall by 7.5m tonnes)

(c) Winners and losers Gain: domestic steel producers (sell 2.5m more at higher price); government (revenue = 50×32.5m=∗∗50 \times 32.5m = **1.625bn**) Lose: consumers (pay $450 not $400; quantity falls); DWL from foregone efficient trades

Worked example 2

Following on from the previous example, where a $50/tonne tariff was imposed on steel:

  • World Price (Pw) = 400400
  • Tariff Price (Pt) = 450450
  • Original quantities: Domestic Supply (Qs) = 20m tonnes, Domestic Demand (Qd) = 60m tonnes
  • New quantities: Domestic Supply (Qs') = 22.5m tonnes, Domestic Demand (Qd') = 55m tonnes Calculate: (a) The total loss in consumer surplus. (b) The gain in domestic producer surplus. (c) The total deadweight welfare loss (DWL).
Show solution outline

(a) Loss in Consumer Surplus This is the area of the trapezium between the old and new price, under the demand curve. Area = 0.5 × (Qd + Qd') × (Pt - Pw) Loss = 0.5 × (60m + 55m) × (450−450 - 400) Loss = 0.5 × 115m × 50=∗∗50 = **2,875 million (or $2.875 billion)**.

(b) Gain in Producer Surplus This is the area of the trapezium between the old and new price, above the domestic supply curve. Area = 0.5 × (Qs + Qs') × (Pt - Pw) Gain = 0.5 × (20m + 22.5m) × (450−450 - 400) Gain = 0.5 × 42.5m × 50=∗∗50 = **1,062.5 million (or $1.0625 billion)**.

(c) Deadweight Welfare Loss DWL is the sum of the production inefficiency and consumption inefficiency triangles. Production DWL = 0.5 × (Qs' - Qs) × (Pt - Pw) Production DWL = 0.5 × (22.5m - 20m) × 50=0.5×2.5m×50 = 0.5 \times 2.5m \times 50 = 62.5m62.5m Consumption DWL = 0.5 × (Qd - Qd') × (Pt - Pw) Consumption DWL = 0.5 × (60m - 55m) × 50=0.5×5m×50 = 0.5 \times 5m \times 50 = 125m125m Total DWL = 62.5m+62.5m + 125m = $187.5 million.

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