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Trade Tariffs in 3 Levels of Difficulty

The document explains the impact of trade tariffs at three educational levels, illustrating how a $2 tariff on wraps raises prices and reduces consumption, benefiting domestic producers while harming consumers. It highlights the inefficiencies and welfare losses caused by tariffs, including increased domestic production and deadweight loss. Additionally, it discusses how tariffs disrupt supply chains and lead to significant economic costs, despite generating some government revenue.

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Woody Woodpecker
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22 views10 pages

Trade Tariffs in 3 Levels of Difficulty

The document explains the impact of trade tariffs at three educational levels, illustrating how a $2 tariff on wraps raises prices and reduces consumption, benefiting domestic producers while harming consumers. It highlights the inefficiencies and welfare losses caused by tariffs, including increased domestic production and deadweight loss. Additionally, it discusses how tariffs disrupt supply chains and lead to significant economic costs, despite generating some government revenue.

Uploaded by

Woody Woodpecker
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Trade Tariffs in

3 levels of
difficulty
#1 High School

Suppose your school cafeteria is selling

sandwiches and wraps for $4.

If the school imposes a $2 tariff on the

wrap seller, the wrap price rises to $6.


More students will choose

sandwiches, buy fewer wraps,

and pay higher prices for both.

This benefits the cafeteria and

generates tariff revenue, but

students lose as they pay

more and some may

skip lunch.
Just like the tariff on wraps,

trade tariffs benefit domestic


producers and generate revenue for
the government, but they harm
consumers by raising prices and
reducing consumption.
#2 Undergraduate
A $2 tariff on wraps raises the
domestic price to $6.

This increases domestic production,

but decreases wrap imports.

Price
Supply

Price + Tariff

World price

Demand
Domestic production imports

Quantity
The tariff reduces welfare by
creating deadweight loss through
higher prices for consumers, higher
inefficient domestic production, and
reduced imports, despite generating
some government revenue.

Price
These consumers

don’t buy wraps

anymore!

Domestic production imports

Quantity
#3 PhD level
A tariff disrupts existing supply chain
relationships. Firms respond by
renegotiating with current suppliers
or conducting costly searches for
new ones in tariff-exempt countries or
domestically.

Grossman, Helpman and Redding, 2024, When Tariffs Disrupt Global


Supply Chains, American Economic Review
Three economists calibrating a model
to match initial import shares and
responses to U.S. tariffs on China
find an overall welfare loss of
0.12% of GDP, driven largely by
changes in input sourcing and search
costs.

Grossman, Helpman and Redding, 2024, When Tariffs Disrupt Global


Supply Chains, American Economic Review
Economists generally dislike tariffs
because they create inefficiency.

While they can be useful for


protecting industries or
safeguarding national security,
tariffs act like a sledgehammer,
often causing significant damage,
especially at home.

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Hi! I am Thomas

Economist based in London

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content.

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