Gains from Trade: The Case for International Cooperation
The sun is not a competitor
In early 2018, the United States put a tariff on imported washing machines. By one measure, it worked. Samsung and LG, which had been shipping washers in from abroad, were building factories in South Carolina and Tennessee, and the industry added about 1,800 American jobs.
Then came the bill. The price of a washing machine rose about 12%, roughly $86 a machine. The price of clothes dryers rose too, by about $92, even though dryers faced no new tariff: people buy washers and dryers as a matched pair, and stores price them together. Add it up and American buyers paid just over $1.5 billion a year more. The Treasury collected about $82 million in tariff revenue. Divide the cost by the jobs and each new job cost American households roughly $815,000 a year. The people who held those jobs were paid a small fraction of that.
Economists like to tell a parable about this. Americans have two ways to make cars. They can build them in Detroit. Or they can grow them in Iowa: plant wheat, load it onto ships, and send it across the Pacific, where it comes back as Toyotas. The second method is a technology like any other; it just happens to run through Japan. (Steven Landsburg made the story famous and credits it to his friend David Friedman.) Seen this way, a tariff on Toyotas doesn't protect American carmakers from foreigners. It protects Detroit's car factories from Iowa's car farms, and makes Americans pay more for cars either way.
So why do countries keep choosing the expensive way? This chapter puts trade on the supply-and-demand graph you've built all unit and answers that question: who wins when a border opens, who loses, why the winners always win more, and why the losers are the ones you hear about.
The World Price
Chapter 5 explained why trade happens at all: when people and countries specialize in what they produce at the lowest opportunity cost, there is more to go around. This chapter asks the next question, the one your graph can answer. When a country opens a single market to the world, who gains, who loses, and by how much?
Start with the market we've used all unit: demand P = 100 − 2Q and supply P = 40 + Q. With no trade at all, a situation economists call autarky, it clears at $60 and 20 units.
Now open the border. Elsewhere in the world, producers with a comparative advantage sell this good for $50. That is the world price. Our country is small next to the world market, so it can buy as much as it wants at $50 without moving that price. On the graph, the world's offer is a flat line at $50.
No one here will pay $60 when $50 is on offer, so the domestic price falls to the world price. Read both curves at $50. Buyers want 25 units: (100 − 50) ÷ 2. Domestic sellers supply only 10: 50 − 40. The gap of 15 units arrives as imports.
Who is better off? Buyers clearly are: they pay less and buy more. Domestic sellers are worse off: they sell fewer units at a lower price. Surplus lets us weigh the two, and the buyers' gain is larger.
Demand P = 100 − 2Q, supply P = 40 + Q. Compare no trade ($60, 20 units) with free trade at a $50 world price.
- Consumer surplus with no trade: ½ × 20 × ($100 − $60) = $400. At $50: ½ × 25 × ($100 − $50) = $625. Consumers gain $225.
- Producer surplus with no trade: ½ × 20 × ($60 − $40) = $200. At $50: ½ × 10 × ($50 − $40) = $50. Producers lose $150.
- Net change in total surplus: $225 − $150 = +$75.
- Check it with the triangle between the curves, from Q = 10 to Q = 25, between $50 and $60: ½ × 15 × $10 = $75.
That triangle is the gains from trade made visible. It is the mirror image of the deadweight-loss triangle from Chapter 6. A deadweight-loss triangle measures trades that should happen and don't; this triangle measures trades that couldn't happen before and now do.
Common misconception "When we buy imports, our money leaves the country and we get poorer." ▸
We trade dollars for goods we value more than the dollars, the same reason you buy anything. And the dollars don't vanish. Foreign sellers can only spend them on American goods, services, or assets, which is how they come back.
In the surplus accounting, consumers gain $225 and domestic producers lose $150. The country as a whole is $75 richer each period, and that is a single market.
Quick check In this market, the world price falls from $50 to $46. How many units are imported now? ▸
Quick check When a country opens a market to imports, which group loses? Is its loss larger or smaller than the buyers' gain? ▸
Retrieval practice Explain in words why the buyers' gain from imports must be larger than the domestic producers' loss. ▸
Every dollar producers lose on the units they still sell goes to buyers as a lower price, so that part is a transfer and cancels out. On top of it, buyers get two things producers never had: cheaper units from foreign sellers who make them at lower cost, and extra units bought by people who now find the good worth its price. Those gains are the triangle, and they come at no one's expense.
Exporters, Importers, and Who Loses
Now flip it. Suppose this country is the low-cost producer and the world price is $70, above our $60. Domestic sellers can sell as much as they like abroad at $70, so they won't take less at home. The domestic price rises to $70.
At $70 buyers want only 15 units: (100 − 70) ÷ 2. Sellers supply 30: 70 − 40. The extra 15 units are exports. Try the surplus accounting before you open the example.
Faded rung: work out the exporter case, then reveal ▸
- Consumer surplus falls from $400 to ½ × 15 × ($100 − $70) = $225. Consumers lose $175.
- Producer surplus rises from $200 to ½ × 30 × ($70 − $40) = $450. Producers gain $250.
- Net change: $250 − $175 = +$75, the triangle ½ × 15 × $10.
Put the two cases side by side and one rule falls out. Whichever side of the market expands with trade wins, and the side that shrinks loses. Either way the country's total surplus rises.
| Country imports (world price below) | Country exports (world price above) | |
|---|---|---|
| Domestic price | Falls to the world price | Rises to the world price |
| Domestic buyers | Win: pay less, buy more | Lose: pay more, buy less |
| Domestic sellers | Lose: sell less at a lower price | Win: sell more at a higher price |
| Total surplus | Rises by the triangle | Rises by the triangle |
Because the winners gain more than the losers lose, the winners could fully compensate the losers and still come out ahead. That is the sense in which economists call trade efficient. Notice what the claim does not say: it does not say the compensation actually happens. Usually it doesn't, and that gap is where the politics of trade lives. Concept 5 comes back to it.
There is a second imbalance, and it explains the washer story. The losses from imports land on a few people: the workers and owners in one industry, often in a few towns. The gains spread across millions of buyers, a little each. Each washer buyer lost about $86; each of the 1,800 jobs was a livelihood. The person who loses a job notices. The person paying $86 more for a washer rarely learns why.
Common misconception "A country that imports more than it exports is losing at trade." ▸
A trade deficit isn't a scoreboard. In this chapter's accounting, the gains come from the imports themselves: buyers get goods more cheaply than the country could make them. Exports are, in a sense, what a country gives up to pay for its imports.
Whether a country runs a trade deficit depends mostly on how much it saves and borrows as a whole, which is a macroeconomics question. Strong economies and weak ones both run deficits. The balance doesn't tell you who is winning.
Quick check In this market, the world price rises from $70 to $80. How many units are exported? ▸
Quick check When the U.S. exports soybeans, which American group loses from that trade, and why do you rarely hear from them? ▸
Retrieval practice Name the winners and losers when a country opens a market to trade, first as an importer and then as an exporter. What is true in both cases? ▸
As an importer, domestic buyers win and domestic producers lose. As an exporter, domestic producers win and domestic buyers lose. In both cases the side that expands wins, and the winners' gain is larger than the losers' loss, so total surplus rises by the gains-from-trade triangle. In both cases the losers are usually concentrated and the winners spread out, which is why trade's losers tend to be louder than its winners.
Tariffs and Quotas
Back in Chapter 5 we said the gut-level horror at a tax on Vermont maple syrup crossing into New Hampshire was the same logic as the case against tariffs between nations, and that we'd make it precise once we had the welfare tools. Time to pay that off. You already own both machines: the world price from this chapter and the tax wedge from Chapter 7.
A tariff is a tax on imports. Go back to the importer case: world price $50, imports 15. The government adds a $6 tariff on each imported unit. Foreign sellers still need $50, so an imported unit now costs $56, and domestic sellers can charge $56 too. Two things happen at once. Buyers move up the demand curve, from 25 units to 22. Domestic producers, shielded by the higher price, move up the supply curve, from 10 to 16. Imports get squeezed from both ends: 22 − 16 = 6 units, down from 15.
Notice that the tariff distorts two decisions, not one. A domestic tax opened a single deadweight-loss triangle. A tariff opens two. Units 10 to 16 are now made at home at a cost above $50, when the world would have sold them for $50: that is wasted production. Units 22 to 25 were worth more than $50 to buyers but are no longer bought: that is lost consumption.
Demand P = 100 − 2Q, supply P = 40 + Q, world price $50, tariff $6. Find the domestic price, production, consumption, imports, government revenue, and deadweight loss.
- Free trade at $50: consumption (100 − 50) ÷ 2 = 25; production 50 − 40 = 10; imports 15.
- With the tariff, the domestic price is $50 + $6 = $56. Consumption (100 − 56) ÷ 2 = 22; production 56 − 40 = 16; imports = 22 − 16 = 6.
- Government revenue (the rectangle): $6 × 6 imports = $36.
- Deadweight loss (two triangles): production side ½ × (16 − 10) × $6 = $18; consumption side ½ × (25 − 22) × $6 = $9. Total $27.
| Who | Change |
|---|---|
| Consumers | −$141 |
| Domestic producers | +$78 |
| Government | +$36 (tariff revenue) |
| Net to the country | −$27 (the deadweight loss, $18 + $9) |
The washer tariff from the start of the chapter fits this picture, with one twist. Washer imports fell so sharply, as Samsung and LG moved production to the U.S., that the revenue rectangle was small: about $82 million. Most of the $1.5 billion that buyers paid went into higher prices on washers made here, and on dryers.
Now the import quota. A quota attacks the same market from the quantity side. Instead of taxing imports, the law caps them: no more than 6 imported units. With only 6 units coming in, the domestic price climbs until the gap between what buyers want and what domestic sellers supply is exactly 6. That happens at $56, the same price the tariff produced. Same price, same 22 consumed and 16 produced, same two deadweight-loss triangles. The tariff and the quota are twins.
They differ in one place: the rectangle. Under the tariff, the $6 gap on each of 6 imported units, $36, goes to the government. Under the quota, the government collects nothing, but the gap still exists: someone buys at the $50 world price and sells at $56. That $36 goes to whoever holds the import licenses, as quota rents. If domestic importers hold the licenses, the $36 stays in the country and the quota costs the nation the same $27 as the tariff. If foreign exporters hold them, which is common when quotas are run by the exporting country, the $36 leaves too, and the quota is strictly worse than the tariff.
Worked example: the matching quota ▸
Same market and $50 world price. Instead of a tariff, the government caps imports at 6 units. Find the domestic price, the deadweight loss, and who gets the rectangle.
- The price rises until imports equal the quota: Qd − Qs = 6. With Qd = (100 − P) ÷ 2 and Qs = P − 40: 90 − 1.5P = 6, so P = $56.
- At $56: consumption 22, production 16, imports 6. The cap binds exactly, identical to the tariff.
- Deadweight loss: the same two triangles, $18 + $9 = $27.
- The rectangle: ($56 − $50) × 6 = $36, now quota rents for license holders rather than revenue.
Common misconception "A quota is gentler than a tariff: there's no tax, so consumers don't pay." ▸
Consumers pay exactly the same under both. A binding quota pushes the domestic price up by just as much as a matched tariff, here to $56 either way, so consumers face the same higher price and buy the same smaller quantity.
"No tax" is true only in the narrow sense that no money reaches the government. The price increase, the lost consumption, and both deadweight-loss triangles are all still there. The one real difference is who captures the rectangle, and if foreign firms hold the licenses, the quota is the more expensive choice for the country.
Quick check A tariff and an import quota are set so that each allows the same number of imports. Which raises the domestic price more? ▸
Quick check Solo: demand P = 80 − Q, supply P = 20 + Q, world price $40, tariff $5. Find the domestic price, imports after the tariff, revenue, and deadweight loss. ▸
Quick check Why might a government prefer a tariff to a matching quota, and why might a domestic industry lobby for the quota instead? ▸
Retrieval practice A tariff and a quota can produce the identical price, quantity, and deadweight loss. What distinguishes them, and why does it matter? ▸
Who captures the rectangle: the price gap times the imported quantity. Under a tariff the government collects it as revenue that stays in the country. Under a quota it becomes rents for whoever holds the import licenses. That matters for who benefits, which is why protected industries often lobby for quotas, and for the country as a whole: if the license holders are foreign, the rectangle leaves the country, and the quota costs the nation both triangles and the rectangle.
Who Actually Pays a Tariff
Ask most people who pays a tariff and you'll hear: the foreign country. It's an easy mistake. The law taxes imports, and imports come from foreigners. But Chapter 7 taught you to ignore whose name is on the bill and ask who can't get away.
Run that test. When our country puts a $6 tariff on imports, foreign sellers have somewhere else to go: they can sell to the rest of the world at $50, the price they always got. Their supply to us is flat at the world price, perfectly elastic. Buyers here have no such escape. So the whole tariff lands on them. The domestic price rises the full $6, from $50 to $56, and foreign sellers still receive $50. Look back at Fig 8.3: the world price line never moved.
Legally, the tariff is paid by the domestic importer, who writes the check to U.S. Customs when the goods arrive. Economically, it is paid by whoever ends up facing the higher price, which mostly means the importer's customers. That is the legal-versus-economic incidence distinction from Chapter 7, at the border.
There is one exception worth knowing. A country that buys a large share of the world's supply of something can push the world price down when it buys less. Then foreign sellers absorb part of the tariff, because they can't easily find other buyers for everything they used to sell. Economists call this a terms-of-trade effect, and it is the one case in which a tariff could, in theory, leave a country better off. It has two catches: the country must be big enough to move world prices, and its trading partners must not retaliate.
2018–19. The U.S. raised tariffs on steel, aluminum, washing machines, solar panels, and hundreds of billions of dollars of Chinese goods. Two teams of economists tracked prices at the border. Both found that foreign sellers did not cut their prices: the tariffs were passed through essentially in full to the prices American importers paid (Amiti, Redding & Weinstein, 2019; Fajgelbaum, Goldberg, Kennedy & Khandelwal, 2020).
2025. When the U.S. raised tariffs far more broadly, several studies reached a similar answer: American buyers of imports bore about 90% of the cost (Amiti and coauthors at the New York Fed; Fajgelbaum & Khandelwal; Gopinath & Neiman). Prices on store shelves moved more slowly, because retailers absorbed some of the cost at first. A Federal Reserve analysis finds that about seven months after the tariffs took effect, consumer prices had risen one-for-one with the tariffs (Minton, Ray & Somale, 2026); other estimates find the pass-through still incomplete at six months.
Reading the evidence. The U.S. is a large economy, so the terms-of-trade exception had its best chance here. In the data, foreign sellers absorbed only a small share. For most goods, the small-country picture fits: the country that imposes the tariff pays it.
Common misconception "Tariffs make other countries pay." ▸
The tax is collected from domestic importers, and the evidence from 2018–19 and from 2025 says the cost was passed on mostly to American buyers. Foreign sellers can usually sell elsewhere at the world price; domestic buyers are the side that is stuck.
A tariff can hurt foreign producers, by shrinking their sales to this country. But hurting them and paying for the tariff are different things. The bill lands mostly at home.
Quick check A small country puts a $10 tariff on a good with a $30 world price. Foreign sellers can sell anywhere in the world at $30. What price do domestic buyers pay, and what do foreign sellers receive? ▸
Quick check Why might part of a tariff fall on foreign sellers when the importing country buys a large share of the world's supply? ▸
Retrieval practice Use the elasticity rule from Chapter 7 to explain why a small country's buyers pay the whole tariff. ▸
The burden of a tax falls on the side that can least escape it. Foreign sellers can sell to the rest of the world at the world price, so their supply to a small country is perfectly elastic: they won't accept less. Domestic buyers have no other place to buy at the world price once the tariff applies. So the price at home rises by the full amount of the tariff, and the buyers, the stuck side, pay it.
The Case for Protection, Weighed
In 1845 the French economist Frédéric Bastiat published a petition, in satire, on behalf of France's candlemakers. They were suffering, they said, from the ruinous competition of a foreign rival who flooded the market with light at an impossibly low price: the sun. They asked the government to order every window, shutter, and skylight closed, so that domestic lighting could flourish. The joke works because its logic is the logic of every tariff: protect producers from cheaper competition, and make everyone else pay.
Bastiat's deeper point was about what we can see. The jobs a tariff protects are seen: you can photograph the factory and interview the workers. The costs are unseen: a few dollars on millions of receipts, and jobs that never appear in other industries because their inputs got more expensive. Economists have measured both sides for specific tariffs. The 2009 tariff on Chinese tires saved at most about 1,200 jobs and cost American buyers about $1.1 billion in 2011, at least $900,000 per job (Hufbauer & Lowry, 2012). The washer tariff cost about $815,000 per job, per year.
The unseen costs include other jobs. Iron and steel mills employ about 85,000 Americans; industries that use steel employ more than 12 million. When the 2018 tariffs raised the price of steel and aluminum, Federal Reserve economists found that manufacturing employment ended up about 0.6% lower than it would otherwise have been, roughly 75,000 jobs, as higher metal prices hit the industries that buy metal (Flaaen & Pierce, 2019). Retaliation cost more: when China and other countries hit back at American farm exports, the federal government paid farmers $23 billion in 2018 and 2019 to cover the damage.
None of this means every argument for protection is wrong. Here are the five you will hear most, each at full strength, with the catch in each.
| Argument | The strongest version | The catch |
|---|---|---|
| Save jobs | Jobs in the protected industry are real, and losing them hurts workers and towns. | Each job saved costs buyers many times its wage, and jobs are lost in industries that buy the protected good or export to countries that retaliate. |
| Infant industry | A young industry might become competitive if shielded while it learns and grows. | Governments struggle to pick which infants will grow up, and protected industries lobby to stay protected long after. |
| National security | A country shouldn't depend on rivals for weapons, chips, or medicine in a crisis. | Real for a few goods, but the label stretches easily, and stockpiles or targeted support can secure supply at lower cost. |
| Unfair trade | A foreign firm, sometimes subsidized by its government, sells below cost to drive rivals out. | Hard to prove, and when a foreign government subsidizes our purchases, our buyers mostly gain. |
| Bargaining chip | Threatening tariffs can pry open foreign markets. | It works only if the threat is credible and the tariff temporary, and it often invites retaliation instead. |
The strongest evidence against an easy view of trade comes from China's rise. After China joined the World Trade Organization in 2001, its exports to the U.S. surged. Daron Acemoglu, David Autor, David Dorn, Gordon Hanson, and Brendan Price estimate that rising Chinese import competition cost the U.S. 2.0 to 2.4 million jobs between 1999 and 2011, counting jobs lost in supplier industries and local businesses. The losses clustered in particular towns, in industries like furniture, textiles, and electronics, and many of those places had not recovered years later.
The other side of the ledger is just as real. Xavier Jaravel and Erick Sager estimate that cheaper goods from China raised the purchasing power of the average U.S. household by about $1,500 a year between 2000 and 2007: roughly $400,000 of added purchasing power for every job displaced.
Reading the evidence. Both findings hold at once. Trade with China made the country richer on net, and it devastated specific places. It is this chapter's two lessons in one case: the winners gained more than the losers lost, and the losses were concentrated while the gains were spread thin.
If trade makes the country richer but hurts specific workers, the efficient response is to share the gain with them: wage insurance, help moving to where the jobs are, training that leads to work. A tariff protects an industry by taxing everyone else, and pays out many times a worker's wage per job saved. The U.S. program built for this, Trade Adjustment Assistance, was always small, and it lapsed in 2022. Keep the gains from trade, and spend some of them on the people who paid for them.
Quick check A tariff raises consumer costs by $600 million a year and saves 750 jobs. What is the cost per job saved? ▸
Quick check A steel tariff protects 5,000 jobs at steel mills. Name two groups who bear the unseen costs. ▸
Retrieval practice Why do democracies often choose tariffs even when tariffs make the country poorer? ▸
The benefits of a tariff are concentrated and visible: one industry, its workers and owners, often in a few places, each with a lot at stake and every reason to organize and lobby. The costs are spread across millions of buyers and across other industries, a few dollars or a few jobs at a time, mostly unseen. Politicians respond to the people who notice. Bastiat's seen and unseen is the whole story: the protected job is on the news, and the costs never are.
The moves you can now make
Four questions at exam level: the gains from trade, a tariff, a matching quota, and the exporter case. Types A through C use one market, so work them in order. Try each on paper first, then reveal.
Type A · opening to trade
A country's domestic demand is P = 120 − 2Q and domestic supply is P = 40 + 2Q. Find the price and quantity with no trade. The country then opens to trade at a world price of $60. Find consumption, production, and imports, and calculate the change in consumer surplus, producer surplus, and total surplus.
Show worked solution ▸
- No trade: 120 − 2Q = 40 + 2Q, so Q = 20 and P = $80.
- At $60: consumption 60 = 120 − 2Q gives Qd = 30; production 60 = 40 + 2Q gives Qs = 10; imports = 20.
- Consumer surplus: ½ × 20 × ($120 − $80) = $400 before; ½ × 30 × ($120 − $60) = $900 after. Change +$500.
- Producer surplus: ½ × 20 × ($80 − $40) = $400 before; ½ × 10 × ($60 − $40) = $100 after. Change −$300.
- Total surplus rises by $500 − $300 = $200, the triangle ½ × 20 × $20.
Type B · the wedge at the border
Same market, world price $60. The government imposes an $8 per-unit tariff (shown below). Find the domestic price, production, consumption, imports, government revenue, and deadweight loss.
Show worked solution ▸
- Domestic price = $60 + $8 = $68.
- Consumption: 68 = 120 − 2Q, so Qd = 26. Production: 68 = 40 + 2Q, so Qs = 14. Imports = 26 − 14 = 12.
- Revenue = $8 × 12 = $96.
- Deadweight loss: production side ½ × (14 − 10) × $8 = $16; consumption side ½ × (30 − 26) × $8 = $16. Total $32.
Type C · tariff versus quota
Instead of the $8 tariff, the government caps imports at 12 units. Find the domestic price and the deadweight loss. Who receives the rectangle, and how much does the country lose in total if foreign exporters hold the import licenses?
Show worked solution ▸
- The price rises until Qd − Qs = 12: (120 − P) ÷ 2 − (P − 40) ÷ 2 = 80 − P = 12, so P = $68, the same as the tariff.
- Deadweight loss: the same two triangles, $32.
- The rectangle, ($68 − $60) × 12 = $96, goes to license holders as quota rents, not to the government.
- If foreign exporters hold the licenses, the $96 leaves the country: total loss = $32 + $96 = $128.
Type D · the exporter case
In another country, domestic demand is P = 100 − Q and domestic supply is P = 20 + Q. The world price is $70. Is the country an importer or an exporter? Find the quantity traded and the change in consumer, producer, and total surplus compared with no trade.
Show worked solution ▸
- No trade: 100 − Q = 20 + Q, so Q = 40 and P = $60. The world price is higher, so the country exports.
- At $70: Qd = 30 and Qs = 50, so exports = 20.
- Consumer surplus: ½ × 40 × $40 = $800 before; ½ × 30 × $30 = $450 after. Change −$350.
- Producer surplus: ½ × 40 × $40 = $800 before; ½ × 50 × $50 = $1,250 after. Change +$450.
- Total surplus rises by $100, the triangle ½ × 20 × $10.
Put the moves together
In the country of Westria, domestic demand for bicycles is P = 90 − Q and domestic supply is P = 10 + Q, where P is in dollars and Q is in thousands of bicycles. Westria then opens to trade at a world price of $30. Later, Westria's bicycle makers persuade the government to impose a tariff of $10 per bicycle.
- Calculate the price and quantity of bicycles in Westria with no trade. (1 pt)
- At the $30 world price, calculate the quantity demanded, the quantity supplied by Westria's producers, and imports. (2 pts)
- Draw a correctly labeled graph showing domestic supply and demand, the world price, and imports. Shade the gain in total surplus from opening to trade, and calculate it. (2 pts)
- With the $10 tariff, calculate the new domestic price, imports, and the government's tariff revenue. (2 pts)
- Calculate the deadweight loss of the tariff, and explain the source of each part of it. (2 pts)
- Suppose that instead of the tariff, Westria limits imports to the same quantity with a quota. What happens to the domestic price, and who receives the amount that was tariff revenue? (1 pt)
Reveal a full-credit response ▸
(a) 90 − Q = 10 + Q, so Q = 40 (thousand) and P = $50.
(b) At $30: quantity demanded = 90 − 30 = 60; quantity supplied = 30 − 10 = 20; imports = 60 − 20 = 40 (thousand).
(c) A horizontal world-price line at $30 below the no-trade equilibrium, with imports marked as the horizontal distance from 20 to 60. The shaded gain is the triangle between the curves, below $50 and above $30, from Q = 20 to Q = 60: ½ × 40 × $20 = $400 (thousand). Check: consumer surplus rises from $800 to $1,800 (+$1,000) and producer surplus falls from $800 to $200 (−$600); the net is +$400.
(d) The domestic price rises to $30 + $10 = $40. Quantity demanded = 50 and quantity supplied = 30, so imports = 20. Revenue = $10 × 20 = $200 (thousand).
(e) Deadweight loss = ½ × (30 − 20) × $10 + ½ × (60 − 50) × $10 = $50 + $50 = $100 (thousand). The first triangle comes from bicycles 20 to 30 now made in Westria at a cost above the world price; the second from bicycles 50 to 60 that buyers valued above $30 but no longer buy.
(f) A quota of 20 raises the domestic price to the same $40. The $200 that was tariff revenue goes instead to whoever holds the import licenses, as quota rents.
Reveal the scoring rubric ▸
- 1 pt (a) No-trade price of $50 and quantity of 40.
- 1 pt (b) Quantity demanded 60 and quantity supplied 20.
- 1 pt (b) Imports of 40.
- 1 pt (c) Correctly labeled graph with the world price below the no-trade price, imports shown, and the gains-from-trade triangle shaded.
- 1 pt (c) Gain in total surplus of $400.
- 1 pt (d) Domestic price of $40 and imports of 20.
- 1 pt (d) Revenue of $200.
- 1 pt (e) Deadweight loss of $100.
- 1 pt (e) Explains both parts: too much domestic production at a cost above the world price, and lost consumption by buyers who valued the good above the world price.
- 1 pt (f) Price is the same $40, and the rectangle goes to import-license holders rather than the government.
Ten independent points. A wrong number in (b) doesn't cost the (d) points if your later work follows correctly from it.
Reveal what loses points ▸
- Conceptual Shading the consumers' whole gain, or the producers' loss, as the gain from trade. The gain in total surplus is only the triangle; the rest is a transfer from producers to consumers.
- Precision Computing tariff revenue on the free-trade imports (40) instead of the imports after the tariff (20).
- Exam craft Drawing the world price above the no-trade equilibrium. When a country imports, the world price must be below the price it would reach on its own.
Unit 1 made a single argument in eight moves. Scarcity forces every choice to cost something, and we make those choices at the margin, weighing the next unit rather than the whole. Out of millions of such choices, supply and demand settle on a price no one sets and everyone reads: the invisible hand coordinating strangers. Push against that price with a binding control and you freeze the very shortage you meant to cure. Left free, the same coordination lets people specialize and trade, and the wealth of nations flows from that cooperation.
Surplus let us measure the value all this creates, and deadweight loss let us see what is destroyed when trades that should happen don't. A tax drives a wedge into that machinery, and the side that can't walk away bears it; a subsidy is the same wedge with the sign flipped, and the stuck side pockets it. And trade carries the whole argument across borders: opening a market makes a country richer even though it creates losers, and a tariff is a wedge at the border that the country's own buyers mostly pay. That is the strongest honest case for letting markets work. It is not the whole story. Markets also fail, sometimes badly, and the next units take that up at full strength, starting where the magic begins to break.
Trade is a technology for turning what we make well into what others make well. Opening a market makes the country richer, though not everyone in it; a tariff taxes the technology, and the country's own buyers pay.
tariffs would be rare, low, and temporary, saved for genuine security needs. The money now spent protecting industries would go to the workers trade displaces, to help them move, retrain, and land on their feet.
- Opening a market to trade raises total surplus: the side that expands gains more than the side that shrinks loses.
- A tariff raises the domestic price, shrinks imports, and creates two deadweight-loss triangles; a matching quota does the same but hands the rectangle to license holders.
- The U.S. tariffs of 2018–19 and 2025 were paid mostly by American buyers.
- The losses from trade are concentrated and can last for years; the gains are spread widely.
- What do the winners from trade owe the losers, and in what form?
- When is the security of domestic supply worth a higher price?
- How much should a country pay to keep one industry's jobs in one place?
When a price rises because of a tariff, you are the one paying it. Judge a trade policy by what it does to the price you pay, not by whose name is on the tax.
Your competition is every way of getting the job done, including from across the world. Specialize in what you do best, and trade for the rest.
