Question: The decrease in consumer surplus divides into three parts. First, some of the consumer surplus is transferred to producers. The blue area B represents this
The decrease in consumer surplus divides into three parts. First, some of the consumer surplus is transferred to producers. The blue area B represents this loss of consumer surplus (and gain of producer surplus).
Second, part of the consumer surplus is transferred to the government.
The purple area C represents this loss of consumer surplus (and gain of government revenue). When the tariff revenue is spent, both consumers and producers receive some benefit, but there is no expectation that the buyers of T-shirts will receive the benefits of the expenditure of this tariff revenue from T-shirts. The tariff revenue is a loss to buyers of T-shirts.
The third part of the loss of consumer surplus is a transfer to no one: it is a deadweight loss. Consumers buy a smaller quantity at a higher price. The two gray areas labeled D represent this loss of consumer surplus. Total surplus decreases by this amount, which is the social loss from the tariff.
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