4.2.5 (HL)—Trade protection calculations

Protection calculations compare the world-price outcome with the protected outcome to measure changes in quantities, surplus, revenue and welfare.

In a tariff diagram, the price rises by the tariff amount, domestic production and consumption change, and government revenue is the tariff multiplied by the quantity imported after protection. The two small welfare triangles represent deadweight losses when the protected quantities are inefficient.

Label every area and quantity before calculating: consumer loss, producer gain, government revenue and the net welfare change are different objects.

If a tariff is 2 and post-tariff imports are 300 units, government revenue is 600 currency units. That revenue is not automatically equal to the welfare loss; compare all surplus changes.

Do not calculate revenue from pre-tariff imports or treat the producer-surplus gain as the country’s net gain.

Apply the same area discipline to all three instruments. For a quota, quota rent equals $(P_q-P_w)\times Q_{imports}$; who gains depends on licence ownership, while net welfare loss is the production- and consumption-distortion triangles. For a production subsidy, government cost equals subsidy per unit × post-subsidy domestic output; consumers retain the world price, producers gain, imports fall and the production-distortion triangle is the net welfare loss. For a tariff, revenue remains tariff × post-tariff imports. In every case use rectangle $=\text{price wedge}\times\text{quantity}$ and triangle $=\tfrac12\times\text{price wedge}\times\text{quantity change}$, then sum transfers and losses without double counting.