Question

multiple choice 2 points
which of the following statements is false?
as a result of a tariff, producers surplus rises.
as a result of a tariff, consumers surplus rises.
as a result of a tariff, consumers surplus falls.
as a result of a quota, consumers surplus falls.

Explanation:

Analyze the effects of a tariff on surplus

Using the Tariff Welfare Analysis knowledge point

• A tariff is a tax placed on imported goods, which raises the domestic price of the good to the world price plus the tariff.
• As the domestic price rises, domestic producers increase their quantity supplied, and their producer surplus increases.
• Conversely, because consumers face a higher price, they reduce their quantity demanded, and consumer surplus decreases.
• Therefore, under a tariff, producer surplus rises and consumer surplus falls.

Analyze the effects of a quota on surplus

Using the Import Quota Welfare knowledge point

• An import quota restricts the physical quantity of imports allowed into a country, which drives up the domestic price of the good.
• Because consumers face a higher domestic price, consumer surplus decreases.
• Therefore, under an import quota, consumer surplus falls.

Evaluate the statements to find the false one

• Statement 1: "As a result of a tariff, producers' surplus rises." This is true.
• Statement 2: "As a result of a tariff, consumers' surplus rises." This is false because consumer surplus falls.
• Statement 3: "As a result of a tariff, consumers' surplus falls." This is true.
• Statement 4: "As a result of a quota, consumers' surplus falls." This is true.

Answer:

• (A) As a result of a tariff, producers' surplus rises.
• (B) As a result of a tariff, consumers' surplus rises. (Correct answer)
• (C) As a result of a tariff, consumers' surplus falls.
• (D) As a result of a quota, consumers' surplus falls.