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Main content
Current time:0:00Total duration:7:05
POL‑1 (EU)
POL‑1.B (LO)
POL‑1.B.1 (EK)
POL‑1.B.2 (EK)
POL‑1.B.3 (EK)

Video transcript

in this video we're going to think about how trade affects the total economic surplus in a market and we're also going to think about tariffs which are a per unit charge that a government will often put on some type of good that is being imported usually to protect a domestic industry but sometimes it's also to raise revenue so right over here we have a simple model for the sugar market in some country and we're originally initially going to assume that this country is operating in isolation so this is the supply curve for the suppliers of sugar in that country and then this is the demand curve for the people who would want to use sugar in that country and you can see the equilibrium price and quantity in that country now in this world we've reviewed this in many videos what's the total economic surplus well the total economic surplus would be defined by this triangle right over here it's the area above the supply curve and below the demand curve and we know that the part above this horizontal line at the price of 3 this would be the consumer surplus and then down here this would be the producer surplus now let's say that this market opens up to the world to the world price and let's say when it does so it does not affect the world price itself the world market is so large and let's say this country's market is relatively small and so the world market let's say that sugar is trading at a dollar fifty per pound so this right over here is the world price a dollar fifty per pound let me write it right over there so this is our world world price now if we assume that it's opened up to this world price what will happen well at the world plot price the consumers in this market the people who are using the sugar well they're going to use a lot more at a dollar 50 the place where that intersects the demand curve is out here so now what is the consumer surplus in this country in this market well the consumer surplus in this country is now much larger it contains a triangle that it contained before and then all of this area that I am now shading in and that has come at the cost of the producer surplus the producers in this country there are in this market they are now only getting that producer surplus right over there but if you look at the total economic surplus it has definitely grown the total economic surplus instead of just being that original triangle it has now extended to include this entire area that goes all the way out there and you can see that that completely contains the previous total economic surplus which we had right over here so theoretically when a market opens up to the world price like this it's going to increase your total economic surplus and if that world price is below the equilibrium price in your isolated economy then it's probably going to be to the benefit of the consumers but the producers are going to lose out on some of their surplus now let's say that a government comes into power and in this market and says hey I I've been elected by the sugar producers of this country I don't like this go this thing going on are sugar producers in our country are getting hurt a lot and they're a big voting bloc so I am going to enact a tariff and once again a tariff is a per unit charge or it's oftentimes a per unit charge and let's say that the tariff is 50 cents 50 cents per pound per pound on imported sugar well then what is the world price going to look like to the market that we're talking about well then for the consumers in this market instead of being able to get the world price at a dollar 50 they would have to pay 50 cents per pound higher than that so the tariff would make the price go over here so in that situation what has just happened well now where we intersect the demand curve is a lower quantity than when we use the world price at the world price we were consuming a lot of sugar in this market now we're going to consume a little bit less sugar but since even with the tariffs our price is still lower than our previous equilibrium price when we were operating in isolation we're still consuming more sugar using more sugar demanding more sugar in this market than we were when we did not have it opened up to trade now what did this tariff do to the surpluses well the consumer surplus has now gone down relative to the free trade scenario we've lost this area down here so now the consumer surplus I will shade it in this blue color and we have increased the domestic producer surplus it has increased to this right over here but what about this region that we seem that seems to no longer be there either in the consumer or the producer surplus well some of it is the government revenue what's the government revenue going to be well it's going to be the amount of the tariff times the quantity so the amount of the tariff is going to be that 50 cents so that's that height right over there and then what's the quantity that they're getting that tariff on well this whole section right over here is the imported quantity this section right over here is the domestic production and this is the imported quantity so the imported quantity times the tariff so this area right over here that is going to be government revenue but you do have some of that total economic surplus that is just becomes deadweight loss now you have this region right over here that is now deadweight loss and this region right over here that is a deadweight loss so I'll leave you there as you can see here that when you open up to trade theoretically it increases the total economic surplus but that could have consequences on the producers and actually there's cases where can have consequences on the users of whatever or the people who are the buyers in this market and many times a government will enact a tariff now you can see that that tariff will reduce the total economic surplus some of that will go towards revenue while other parts of it will just be dead weight loss another idea that a government might sometimes do is an idea of a quota where they're saying hey we just don't like the total amount of imports that are happening so they might just put a cap on it I'll let you think about how you might deal with a quota and how that might also affect the economic surplus