Question

When a country that imports a particular good imposes a tariff on that good, a. producer surplus decreases and total surplus decreases in the market for that good. b. producer surplus decreases and total surplus increases in the market for that good. c. producer surplus increases and total surplus decreases in the market for that good. d. producer surplus increases and total surplus increases in the market for that good.

Answer 1

Answer:

The correct answer is C: producer's surplus increases and total surplus decreases in the market for that good. The tariff translates into higher prices on the imported good, which reduces the quantity demanded. Therefore, the total surplus in the market for that good decreases. Domestic production, in turn, will also expand, meaning an increase in producer's surplus.

Explanation:

A tariff hike increases the price of a particular product, and this reduces the quantity demanded while encouraging domestic producers to increase output. In the short run, however, price levels will be higher overall, as domestic producers won't be able to supply the market at the pre-tariff prices. Higher prices reduce total demand, thus decreasing total surplus in the market, but will also benefit local producers, as demand will shift to domestic production due to higher import prices.