Redistribution effect on tariff graph (1 Viewer)

[Axio]

Hi,

Can anyone explain what the redistribution effect on a tariff graph is and how to understand it by looking at the graph?

 

[matchalolz]

Hi,

Can anyone explain what the redistribution effect on a tariff graph is and how to understand it by looking at the graph?

I made this example up myself so it is a bit shifty but here goes...
(refer to my graph picture) -> jk, not sure if you can see it, tell me if you can't
http://imgur.com/FLWUZVa

At the world price (price before tariff) of 0D ($5), (domestic) suppliers are willing to produce 0J (50 units), therefore earning a revenue of 5*50 = 250.
However, when the tariff is imposed, the price rises from 0D ($5) to 0A ($10) - because the tax on imports allows suppliers to rise prices to earn greater revenue. At this higher price, suppliers are also willing to produce more goods, so now 0K (100 units). Therefore revenue is 100*10 = 1000.
Compared to before, they earn $750 more.

Before the tariff was imposed, domestic suppliers produced 50 units, whilst consumers demanded 250 units, meaning that the country imports 200 units to fulfil this demand. Therefore importer's income is 200*$5 = $1000. However, after the tariff is imposed, suppliers produce more (100 units) and consumers demand less (200 units), therefore the country only needs to import 100 units. Income = 100*$10 = $1000. Yep, i know the incomes are the same but i didn't think this through properly when creating the example. But say that the price after tariff was $8 rather than $10; income before tariff would still be $1000, however, income after tariff would be $800 hence losing money of $200.

The government will earn revenue of BK ($5- tariff) multiplied by BF (100 units - quantity of imports when the tariff is in place). Therefore revenue of $500.

In summary, domestic suppliers earn more revenue and governments earn more revenue as well, however, this is at the cost of importers losing income - my example just didn't illustrate this point clearly. Maybe just cross out the $10 for price after tariff and replace it with $8 and the example should work out better

Feel free to ask anything if you don't understand