IB Economics SL & HLTopic 4 — The Global EconomyPaper 1, 2 & 3Core skill~10 min read
Tariffs
A tariff is just a tax on imports, but the diagram it produces is one of the most examined pictures in the whole course. Once you can find the four areas on it, you can answer almost anything: government revenue, producer gains, consumer losses and welfare loss all sit in the same drawing.
📚 What you need to know
A tariff is a tax on imported goods and services, sometimes called a customs duty.
It raises the price of the import inside the country, so the world supply line shifts up by the size of the tariff.
Domestic supply extends, domestic demand contracts, and imports fall.
Domestic producers gain revenue and producer surplus; consumers lose through higher prices and less choice.
The government gains tax revenue equal to the tariff multiplied by the quantity still imported.
There is a welfare loss, because less efficient domestic firms replace more efficient foreign ones and some consumers are priced out.
Downstream producers who use the imported good as an input face higher costs too — the point most students forget.
The tariff diagram
Start with the free trade position: the world supply line Sw sits below the domestic equilibrium, so the country imports. Adding the tariff lifts that line to Sw + tariff, and everything else follows from the new, higher price.
Draw the two horizontal price lines first, then find where each one cuts the domestic curves. Every quantity you need comes from those four crossings.
🧩 Reading the four areas
Area 1 — the gain in domestic producer surplus. Domestic firms now sell more, at a higher price.
Area 2 — welfare loss from inefficient production. Domestic firms that cost more than foreign firms are now producing.
Area 3 — government tax revenue: the tariff per unit multiplied by the imports that remain.
Area 4 — welfare loss from lost consumption. Some buyers are priced out of the market entirely.
All four together are what consumers lose. Only areas 1 and 3 go to anybody; 2 and 4 disappear.
Where the consumers’ loss actually goes
A transfer moves money from one group to another; a welfare loss is output and satisfaction that nobody ends up with.
Who is affected
Stakeholder
What happens to them
Domestic producers
Sell more at a higher price, so revenue and producer surplus rise; employment in that industry may rise
Foreign producers
Sell far less into this market; their revenue falls even though the price paid has risen
Domestic consumers
Pay more, buy less, and lose consumer surplus; the burden is heaviest on low-income households
The government
Collects tariff revenue, but only on the imports that still arrive
Downstream producers
Firms using the import as a raw material face higher costs, and may cut output and jobs
Society
Net welfare loss, because efficient foreign supply is replaced by less efficient domestic supply
The strongest evaluation point on tariffs is the job count. A tariff on steel protects steelworkers, but every carmaker, builder and appliance factory that buys steel now pays more — and those industries between them may employ far more people.
Worked examples
WORKED EXAMPLE
Revenue and expenditure after a tariff
A country imports sugar at a world price of $4 per kg. At $4, domestic firms supply 20m kg and consumers demand 100m kg. The government imposes a $1 per kg tariff. At $5, domestic supply is 40m kg and demand is 90m kg. Calculate (a) government revenue, (b) the change in domestic producer revenue, (c) the change in consumer expenditure. [6]
(a) Government revenue = tariff × imports after
imports after = 90m − 40m = 50m kg
= $1 × 50m$50 million(b) Domestic producer revenue
before: $4 × 20m = $80m; after: $5 × 40m = $200man increase of $120 million(c) Consumer expenditure
before: $4 × 100m = $400m; after: $5 × 90m = $450man increase of $50 millionConsumers spend more for less sugar. That single sentence is worth an evaluation mark.
WORKED EXAMPLE
Calculating the welfare loss
Using the same figures, calculate the welfare loss caused by the tariff. [3]
Step 1: identify the two triangles
One on the left (inefficient domestic production), one on the right (consumers priced out).
Step 2: left triangle
base = 40m − 20m = 20m, height = $1
= ½ × 20m × 1 = $10mStep 3: right triangle
base = 100m − 90m = 10m, height = $1
= ½ × 10m × 1 = $5mwelfare loss = $15 millionBoth triangles have the tariff as their height. That is always true, which makes them quick to compute.
💡 Exam tip
Label four quantities on the diagram, and be clear which pair is imports before and which is imports after.
The height of every rectangle and triangle is the tariff. Only the bases change.
Government revenue uses imports after the tariff, never the original import quantity.
Shade and name the areas you are asked about. Examiners look for the areas, not just the words.
Check the units: prices per kg, quantities in millions, answers in millions of dollars.
For evaluation, ask how elastic demand is. Inelastic demand means the tariff raises revenue but barely cuts imports.
⚠ Common mix-up
Shifting the domestic supply curve. A tariff shifts the world supply line; Sd stays where it is.
Using imports before the tariff to calculate government revenue.
Calling area 1 a welfare gain. It is a transfer from consumers to producers, not new value.
Forgetting one of the two welfare loss triangles.
Assuming foreign producers pay the tariff. The price inside the country rises, so domestic consumers carry most of it.
Ignoring downstream industries that use the import as an input.
Up next: Quotas — a physical limit rather than a tax, which produces a similar-looking picture with one crucial difference: the government gets nothing.
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