4. Effects of a tariff on international trade The following graph shows the dome

Question

4. Effects of a tariff on international trade The following graph shows the domestic supply of and demand for oranges in New Zealand. The world price (Pw) of oranges is $800 per ton and is represented by the horizontal black line. Throughout the question, assume that the amount demanded by any one country does not affect the world price of oranges and that there are no transportation or transaction costs associated with international trade in oranges. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. 1160Domestic Demand 1120 t 1080 1040 t 1000 t 960 Domestic Supply uu 920 - 880 840 800 760 Pw 0 10 20 30 40 50 60 70 80 90 100 QUANTITY (Tons of oranges)

Explanation / Answer

If New Zealand is open to international trade in oranges without any restrictions, it will import 80 tons of oranges. (= 90 - 10)

Suppose the New Zealand government wants to reduce imports to exactly 40 tons of oranges to help domestic producers. A tariff of $80 per ton will achieve this. (Effective price = $880)

A tariff set at this level would raise $3200 in revenue for the New Zealand government. (=40 x 80)

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