Trace a tariff from prices to lost surplus
Start with an import bill
Imagine buyers can purchase an item from foreign suppliers for 6 currency units. A tax of 2 per imported item makes the import offer 8. Before calculating surplus, predict which buyers stop purchasing and which domestic producers can now sell. The fixed world price is an explicit assumption.
Run three comparisons
Keep world price at 6. Capture the zero-tariff case, tariff 2, and a tariff that stops imports, with a short explanation for each. Reconcile the consumer loss with producer gains, government receipts and lost surplus. Then change world price, predict the new stopping threshold and test it.
The playground responds only when you change a control. Read the numerical table alongside the chart. Both axes stay fixed, and every drawn quantity comes from the same model. The source notebook and capture buttons preserve your interpretation as well as settings.
Understand the price rule
Consumers pay the domestic market price for both local and imported identical goods in this competitive model. Local producers receive that price, but the government collects the import tax only on imports. Confusing demand with imports overstates revenue.
The consumer loss has several destinations. Part becomes producer gain and part government revenue; neither is a net loss inside the stated domestic accounting. Extra costly domestic production and forgone beneficial consumption create the remaining loss.
Once imports disappear, increasing the tariff cannot keep raising the domestic price in this model. At price 12, supply and demand both equal 8. A higher price would leave unsold domestic output; competition returns the market to its no-trade equilibrium.
This is a mechanism experiment with fixed schedules, not an empirical estimate. A recommendation must identify objectives and distributional concerns, plus evidence about actual demand, production, import responses and omitted effects.
Read the equations in words
Let P be currency units per item; Qd and Qs are items demanded and supplied per period. Here Qd = 20 − P and Qs = P − 4. Every one-unit rise in price removes one demanded item and adds one supplied item. Solving 20 − P = P − 4 gives 2P = 24, so the no-trade price is 12 and quantity 8.
Let Pw be world price and t the tariff per imported item. Domestic price is the smaller of Pw + t and 12. When imports remain positive, imports M = Qd − Qs. Receipts are t × M. When M = 0, receipts are zero even if t is large. This is a competitive equilibrium rule, not a legal maximum price.
Follow the default worked example
At world price 6, free trade gives supply 2, demand 14 and imports 12. A tariff of 2 raises domestic price to 8: supply 4, demand 12, imports 8. Receipts are 2 × 8 = 16. Consumer surplus falls from 98 to 72 (−26), producer surplus rises from 2 to 8 (+6), and government gains 16; total change is −26 + 6 + 16 = −4. Two loss triangles of area 2 each explain the missing 4.
Why triangles measure gains
Demand’s inverse equation is P = 20 − Q. Each item’s willingness to pay lies above the purchase price until quantity demanded is reached. The region is a triangle, so consumer surplus is half its base Qd times its height 20 − P. Supply’s inverse equation is P = 4 + Q. Producer surplus is half Qs times P − 4. These are areas in currency units per period. They are not the number of buyers, revenue or a direct measure of happiness.
The production-loss triangle measures extra domestic costs above the fixed import price. The consumption-loss triangle measures gains forgone when higher prices prevent purchases. Their combined area equals the fall in consumer surplus plus producer surplus plus government receipts.
Explain the stopping point
At world price 6, a tariff of 6 reaches price 12 and eliminates imports. Raising the tariff to 7 leaves domestic price at 12, not 13. Capture both cases and explain why government receipts stay zero. Then try a different world price and state your threshold prediction before moving the tariff.
Make a qualified decision
Write two separate statements: what the model computes under its assumptions, and what policy you would recommend under a stated objective. Identify who gains and loses; do not equate an aggregate surplus total with equal effects on people. Specify evidence that could overturn a model assumption. A different policy judgment can be defensible if factual claims and tradeoffs are explicit.
Extend independently
Guided: Use the default world price, label supply/demand/imports, and explain why tax revenue is not tariff times total purchases.
AP: Use the graph to identify consumer and producer changes, the revenue rectangle and both loss triangles. Explain why a prohibitive tariff needs a different price rule.
Introductory college: Reproduce the calculation from the two inverse schedules. Test every supported price/tariff pair and design an empirical comparison addressing price pass-through or foreign-supply response. Discuss distributional weights and omitted markets.
Method and source
The FAO methodological resource explains tariff and partial-equilibrium analysis. The lab’s equations, numbers and diagrams are original teaching choices; they do not reproduce a real country or identify a current policy effect.
State which settings you compared and show the accounting identity. Explain the revenue turning point and no-import boundary. Separate the calculated efficiency result from a policy judgment and name evidence the model omits.
