Exhibit 4.2
In the absence of international trade,assume that the equilibrium price and quantity of motorcycles in Canada is $14,000 and 10 units respectively.Assuming that Canada is a small country that is unable to affect the world price of motorcycles,suppose its market is opened to international trade.As a result,the price of motorcycles falls to $12,000 and the total quantity demanded rises to 14 units; out of this total,6 units are produced in Canada while 8 units are imported.Now assume that the Canadian government levies an import tariff of $1,000 on motorcycles.
-Refer to Exhibit 4.2.The tariff's redistribution effect equals $7,000.

Question

Exhibit 4.2 
In the absence of international trade,assume that the equilibrium price and quantity of motorcycles in Canada is $14,000 and 10 units respectively.Assuming that Canada is a small country that is unable to affect the world price of motorcycles,suppose its market is opened to international trade.As a result,the price of motorcycles falls to $12,000 and the total quantity demanded rises to 14 units; out of this total,6 units are produced in Canada while 8 units are imported.Now assume that the Canadian government levies an import tariff of $1,000 on motorcycles.
-Refer to Exhibit 4.2.The tariff's redistribution effect equals $7,000.

Quizplus · Accepted Answer

The redistribution effect of a tariff is the difference between the tariff revenue collected by the government and the loss in consumer surplus due to the higher price caused by the tariff. In this case, the tariff revenue collected is equal to $8,000 (8 units imported x $1,000 tariff per unit). The loss in consumer surplus is equal to $1,000 (the difference between the pre-tariff price of $12,000 and the post-tariff price of $13,000). Therefore, the redistribution effect is equal to $7,000 ($8,000 - $1,000).

Exhibit 4.2 In the Absence of International Trade,assume That the Equilibrium Price