Trade and welfareslide 1 S D Q P 100 P* = Z$50 The diagram below shows the domestic market for water in Zimbabwe. No trade is taking place. WATER MARKET World PriceP = Z$30 World Price Plus Tariff P = Z$40 IMPORTS IMPORTS - 70 GOVT. REVENUE - Z$ 700 International Trade Begins Small Country Zimbabwe Z$10

Trade and welfareslide 2 S D Q P P* = $1 WATER MARKET THE DOMESTIC MARKET FOR WATER WHAT HAPPENS WHEN A TARIFF IS IMPOSED ? INTERNATIONAL TRADE BEGINS LARGE COUNTRY UNITED STATES GOVERNMENT REVENUE- DOMESTIC PAID $ 14 World price Before tariff P* = $.60 Domestic Price after Tariff GOVERNMENT \ REVENUE- FOREIGN PAID $14 P = $.80 World price after tariff P* = $.40

Trade and welfareslide 3 A B S D Q P 100 P* = $1 What happens with trade? What are the welfare effects of trade? WATER MARKET P* = $.60 World price IMPORTS B A INCREASE IN CONSUMER SURPLUS DECREASE IN PRODUCER SURPLUS INCREASE IN TOTAL SURPLUS

Trade and welfareslide 4 XY S D Q P 100 P* = $10 The diagram below shows the U.S. domestic market for flags. No trade is taking place. FLAG MARKET EXPORTS - 90 INCREASE IN PRODUCER SURPLUS DECREASE IN CONSUMER SURPLUS INCREASE IN TOTAL SURPLUS WORLD PRICE P = $12 WHAT HAPPENS WITH TRADE? WHAT ARE THE WELFARE EFFECTS? Y

Trade and welfareslide 5 S D Q P 100 P* = Z$50 The diagram below shows the domestic market for water in Zimbabwe. No trade is taking place. WATER MARKET World PriceP = Z$30 World Price Plus Tariff P = Z$40 IMPORTS IMPORTS - 70 GOVT. REVENUE - Z$ 700 International Trade Begins Small Country Zimbabwe Z$10

Trade and welfareslide 6 S D Q P P* = $1 WATER MARKET THE DOMESTIC MARKET FOR WATER WHAT HAPPENS WHEN A TARIFF IS IMPOSED ? INTERNATIONAL TRADE BEGINS LARGE COUNTRY UNITED STATES GOVERNMENT REVENUE- DOMESTIC PAID $ 14 World price Before tariff P* = $.60 Domestic Price after Tariff GOVERNMENT \ REVENUE- FOREIGN PAID $14 P = $.80 World price after tariff P* = $.40