Canada produces steel domestically and also imports it from abroad. Assume that the world market for steel
Question:
a. Draw a diagram showing the Canadian market for steel, with imports at the world price.
b. Explain why the imposition of a tariff on imported steel will increase the price of steel in Canada.
c. Who benefits and who is harmed by such a tariff? Show these effects in your diagram.
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Step by Step Answer:
a See the figure below The demand and supply curves are for Canadian consumers and Canadian producers respectively The world price p w is shown below the price that would exist in Canada if Canada were a closed economy p c Canada produces Q 1 units of steel and consumes Q 2 units of steel importing the difference from abroad b We assume here that we are talking about one particular grade of steel so that the foreign steel is identical to the domestic steel With a tariff of t dollars per unit on imported steel the price in Canada of imported steel will now be p w t But the law of one price says that identical products will sell for the same price so the price of domestic steel will also rise by t dollars per unit the price in the rest of the world will not be affected by the Canadian tariff since Canada is a small country The Canadian price rises to p w t The quantity supplied domestically rises to Q 3 while the quantity demanded domestically falls to Q 4 Imports therefore fall from Q 1 Q 2 to Q 3 Q 4 c Domestic consumers clearly lose since they consume less steel and pay a higher price per unit The loss of consumer surplus is shown by areas 1 plus 2 plus 3 plus 4 Canadian steel producers and their workers gain from the tariff since it raises the price and allows them to increase sales The gain in producer ...View the full answer
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Related Book For 
Microeconomics
ISBN: 978-0321866349
14th canadian Edition
Authors: Christopher T.S. Ragan, Richard G Lipsey
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