CFA Level I · CFA Level I Exam · International Trade
A small open economy imposes an import tariff on a good that it imports at the world price. Compared with free trade, the tariff will most likely cause domestic consumer surplus to:
A tariff lifts the domestic price above the world price, so consumer surplus falls while domestic producer surplus rises. Buyers pay more and purchase less, whereas local producers sell more at the higher price. The government gains tariff revenue, and a deadweight loss arises.
- Afall and domestic producer surplus to fall
- Bfall and domestic producer surplus to riseCorrect
- Crise and domestic producer surplus to fall
Explanation
A tariff raises the domestic price above the world price. Consumers buy less at a higher price, so consumer surplus falls. Domestic producers receive a higher price and produce more, so producer surplus rises. The government also collects tariff revenue, and a deadweight loss results.
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