Question

The United States produces beef and also imports beef from other countries. a. Draw a graph showing the demand and supply of beef in the United States. Assume that the United States can import as much as it wants at the world price of beef without causing the world price of beef to increase. Be sure to indicate on your graph the quantity of beef imported. Assume that the world price of beef is lower than the U.S. price. b. Now show on your graph the effect of the United States imposing a tariff on beef. Be sure to indicate on your graph the quantity of beef sold by U.S. producers before and after the tariff is imposed, the quantity of beef imported before and after the tariff, and the price of beef in the United States before and after the tariff. c. Discuss who benefits and who loses when the United States imposes a tariff on beef.

Short answer

The imposition of a tariff raises the price of beef in the United States, reduces its imports, and increases domestic production. This benefits U.S. beef producers and the government (via tariff revenues) but harms consumers (who now pay higher prices and have less beef) and foreign beef producers (who sell less).

Step-by-step solution

Draw initial supply and demand graph

Start by drawing two axes - price on y-axis and quantity on x-axis. Draw a downward sloping demand curve and an upward sloping supply curve. Mark the equilibrium point where the two curves intersect. This point gives us the original price and quantity of beef in the United States before imports.

Incorporate World Price

Let's add another horizontal line which represents the world price of beef (since the question states that the world price is lower than the U.S. price, this line will be below the equilibrium point). The quantity at which this line intersects with the demand and supply curves represents the quantity domestically produced and quantity demanded at world price. The difference between those quantities is the amount of beef imported.

Show the effect of tariff

To show the effect of tariff, add another horizontal line above the world price line. This new line represents the new price after tariff. The intersection of this line with the supply and demand curves gives new quantity domestically produced and new quantity demanded. The difference between these quantities represents the new, reduced amount of imports.

Identify who benefits and loses out

With the tariff, domestic producers gain as they are now able to sell more beef at a higher price, hence they benefit. Consumers lose as they have to pay higher prices for beef and also get to consume less. There's also less beef imported meaning foreign producers are selling less and hence, they lose out. The government benefits from the revenue raised from the tariff.

Key concepts

Supply and Demand Graph

When considering the impacts of tariffs on imports, understanding the supply and demand graph is essential. In this graph, the price of beef is represented on the y-axis, while the quantity is on the x-axis. The demand curve slopes downward, indicating that as the price decreases, the quantity demanded increases. Conversely, the supply curve slopes upward, reflecting that higher prices incentivize producers to supply more.

The intersection of these curves marks the equilibrium, where supply equals demand, determining the initial market price and quantity for beef. It's crucial to consider how world market dynamics can shift this equilibrium, especially through imports.

World Price vs. Domestic Price

The world price of beef plays a significant role when analyzing tariffs. In this scenario, the world price is lower than the domestic equilibrium price. This price is depicted as a horizontal line beneath the equilibrium point on the graph, illustrating that the U.S. can import beef freely at this lower price.

At the world price, Americans demand more beef than domestic producers supply. This gap is filled by imports. The difference in price between domestic and world levels prompts increased demand, benefiting consumers with lower prices. Once tariffs are imposed, this dynamic shifts as tariffs raise the effective price of imported beef higher than the world price, but generally still below full domestic price without imports.

Domestic and Imported Quantity

The interplay between domestic production and imported quantities is crucial in understanding the tariff's impact. Initially, domestic production is less than the total quantity demanded at the world price, leading to a need for imports to cover the shortfall. This can be visualized on the graph as the horizontal distance between the domestic supply curve and the demand curve at the world price level.

After the tariff is imposed, the increased price leads to a decrease in the total quantity demanded, while encouraging domestic producers to increase their output due to the higher price. Consequently, the quantity of beef imported decreases, as shown by the new intersection point post-tariff on the graph. Critics and proponents of tariffs weigh these changes, considering who benefits and who loses. While domestic producers might gain some market share, consumers face higher prices, and foreign exporters see reduced sales.