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Main content
Current time:0:00Total duration:7:22
AP.MICRO:
POL‑1 (EU)
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POL‑1.B (LO)
,
POL‑1.B.1 (EK)
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POL‑1.B.2 (EK)
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POL‑1.B.3 (EK)

Video transcript

we're told sugar is freely traded in the world market assume that a country Laurel and is a price taker in the world market for sugar some of the sugar consumed in Laurel and is produced domestically while the rest is imported the world price of sugar is $2 per pound the graph below shows Laurel and sugar market and P sub W represents the world price so we see our domestic demand we see our domestic supply and then we see the world price all right now let's try to answer the questions that they have given us at the world price of $2 per pound how much sugar is Laurel and importing so pause this video and see if you can figure that out on your own alright now let's do it together so at first you look at your domestic demand and see well what would the domestic demand be at the world price so that would be where these two lines intersect so the domestic demand at the world price would be 14 million pounds you might be tempted to put 14 million pounds here but that would be the total domestic demand at that world price but some of that is domestically produced and some of it is imported how much is domestically produced well at a price of $2 the domestic producers are up for producing 2 million of those 14 million pounds so this is domestic production and so between these two points that length that represents how much is actually imported so to go from 2 million pounds to 14 million pounds 14 minus 2 is 12 million pounds that is imported 12 million pounds Part B suppose that lure land imposes a per unit tariff on sugar imports and the new domestic price including the tariff is $4 identify the new level of domestic production so once again pause the video and try to figure that out alright so they say the new domestic price including the tariff is $4 so we are now in this situation this is the new price now they say what is the new level of domestic production so the domestic supply at that price the domestic suppliers look like they are willing to supply 6 million pounds so that is our new of domestic production six million pounds all right part to calculate the domestic consumer surplus for Laurel and you must show your work pause the video and see if you can figure that out well the domestic consumer surplus for Laurel and in this scenario we're this is the price well then we are going to let me scroll down a little bit so we can see the entire consumer surplus that is going to be the area above this horizontal line at the price and below our domestic demand curve so this right over here is the consumer surplus in that scenario and so that is going to be this width which is the quantity demanded which is ten million pounds times the height which is you're going from four to nine dollars so it has a height of five dollars and then times one-half if I just multiplied the quantity times the height I'd be figuring out the area of this entire rectangle so it's a little bit of geometry review to get half of that we would multiply it by half so this is going to be it's going to be ten million pounds right over here so if some space ten million pounds times we have a difference of five dollars per pound five dollars per pound and then of course we want to multiply it times one-half so this one right over here so let's see the pounds cancel out and so if you multiply it out this is going to be fifty million dollars times one half so it's going to be 25 million dollars all right part three scroll down a little bit calculate the total tariff revenue collected by the government this also says you must show your work once again pause the video and see if you can work through that so the tariff revenue collected by the government well we went from a world price of two dollars per pound to a domestic price of four dollars per pound so it was a $2 per pound tariff and the government is collecting that two dollars per pound on the imports so in this situation this is the domestic supply we've already talked about that and so this amount right over here are the imports so if you multiply this amount which went from six million pounds to ten million pounds so this is going to be four million pounds times the tariff which is $2 per pound per pound you're going to get this area which would be the government revenue so this is going to be four million pounds times two dollars per pound times two dollars per pound pound cancels out and this is an area of a rectangle here and so this is going to be equal to eight million eight million dollars all right now let's do Part C given the world price of two dollars what per unit tariff maximizes the sum of Laurel Anne's domestic consumer surplus and producer surplus pause the video once more and see if you can figure this out all right so you might be tempted to try out a bunch of tariffs and figure out if you can get a higher total surplus but the important thing to realize is any tariff is going to reduce your total economic surplus so you can immediately go and say that hey the ideal per unit tariff is going to be zero dollars per unit and if you want to see visually why that is we talked about it in other videos remember in the first situation where we are just at the world price without any tariffs the total economic surplus this is the domestic producer surplus which isn't that much but you have a huge consumer surplus you have all of this area as well so the those two triangles make the total economic surplus now tariff is going to raise this level and as you raise this level as you saw in the case of Part B well you're going to shrink this upper triangle you will grow this bottom triangle but you're still going to be smaller than your two triangles that you had before because look at that second scenario the scenario in part be your consumer surplus has now shrunk to this right over here your producer surplus has grown to that over there but you haven't grown the total surplus in fact now for the consumers and the producers you've lost this entire triangle some of it is captured by government revenue but you also have deadweight loss you also just have this section and this section has just dead weight loss and so any tariff is going to reduce the is going to reduce your possible economic surplus so a zero dollar tariff theoretically would maximize your total economic surplus