Every Paper 3 trade question uses the same diagram. Read the four quantities and two prices first.
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The tariff, stakeholder by stakeholder
| Stakeholder | Working | Change |
|---|---|---|
| Consumers' spending on the good | 5 × 50 − 3 × 70 = 250 − 210 | +$40 thousand |
| Home producers' revenue | 5 × 30 − 3 × 10 = 150 − 30 | +$120 thousand |
| Foreign producers' revenue | 3 × 20 − 3 × 60 = 60 − 180 | −$120 thousand |
| Government tariff revenue | 2 × (50 − 30) | +$40 thousand |
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Surplus changes are trapeziums and triangles.
Surplus and welfare: the formulas
Change in consumer surplus
−½ × (Q4 + Q3) × tariff = −½ × (70 + 50) × 2 = −$120 thousand.
Change in producer surplus
+½ × (Q1 + Q2) × tariff = +½ × (10 + 30) × 2 = +$40 thousand.
Welfare loss
Two triangles: ½ × (Q2 − Q1) × tariff + ½ × (Q4 − Q3) × tariff = 20 + 20 = $40 thousand.
Check
−120 + 40 + 40 (revenue) = −40: the welfare loss.
The points to remember
- Areas: rectangle = base × height; triangle = ½ × base × height.
- Write the working, then the answer with units: one mark each.
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The same method works for the other forms of protection.
Quotas, subsidies and currencies
Quota rent
Same price, same quantities: (5 − 3) × 20 = $40 thousand goes to licence holders, not the government.
Cost of a subsidy
Subsidy per unit × home output: $2 × 30 thousand = $60 thousand.
Another currency
Divide by the rate: $120 thousand at $0.25 per peso = 480 thousand pesos.
The points to remember
- Quota: no government revenue; the rectangle is quota rent.
- Revenue changes: work out before and after, then subtract.
Paper 3 asked this in November 2022, for 2 marks.
Using the diagram, calculate the change in social/community surplus that would result from removing the $2 tariff.
Model answer plan
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Where marks are lost
Forgetting ½
Triangles need ½; rectangles do not.
Old imports
Tariff revenue uses imports after the tariff.
No units
$ and thousand: write both.