So, we've just seen that for an importing country and exporting country, when they join into world trade, the effects are different. We can see in particular, the importing country is going to find opposition to trade because what you see looking at this graph is you see that whereas before, producers produced this much and had a producer surplus that was this big. Now, since they're importing so many goods, they're producing only this much. Okay? And they've lost producer surplus. Now, the consumer has gained but often the consumer is not the top priority of governments. They are not the top priority in politics. The consumer is better off but they may not know why. They may not know that there was cars that they buy that are manufactured in Mexico are allowing them to purchase a lot of other things because the price of the car has gone down. Their surplus has increased, whereas the automakers might be very, very verbal going to the national government demanding protection. So, let's see if the industry, this is steel, okay, if the steel industry in the importing country goes to the government and asks for protection and obtains it, what happens to the consumer, to the producer as a result? Okay? So, let's assume they go to their government and they say, "We can't live at P_sub_w, the Chinese are taking all our jobs. The Mexicans are taking all our jobs, whoever the name of the day is. We need a tariff." And so, the government says, "Okay. Here you go. Here's a tariff." And so, the government, what it does is it adds a sort of a tax on to the price of the good. So, we're going to call this line P_w_plus_T. It's the world price of the good with the tariff added on to it. And let's use the analysis, the same tools, to see what happens and what occurs with consumer and producer surplus and therefore, total national welfare as a result of the tariff. Okay? So, here's our new price and we find as we look at this price and analyze what will happen next, we find the producer does nicely. Okay? Because the producer now finds that at higher price more of them are able to survive and so we get a new quantity supplied. I'm going to call this quantity supplied prime. We get a new quantity supplied which is larger. The consumer, on the other hand, of course, is the one that loses out in the importing country. The consumer finds that steel is now more expensive and therefore they can't buy as much of it. So, this will be our quantity demanded. I'm going to make that prime. It's the green line. So, you see, there's more supplied, there's less demanded. What we want to see now is what happens to total welfare in the country. Remember, total welfare is the sum of consumer plus producer surplus. Now, we saw in our first analysis with no trade, consumer plus producer surplus was this much. We got trade in there and consumer plus producer surplus added that triangle. What happens to it with the tariff? Well, we've seen that producers are happy. Producers do better. They gain all of this surplus. Okay? So, producers are happy. They have more surplus than before. You see, the total area is a producer surplus. The consumers have lost some surplus. They used to have this entire area and now, they have only this area. Can you see? It's slightly smaller. That's the price. This is the area under the demand curve. So, what they've lost is this piece in here. Okay? This piece right in here. Where did it go? Well, one part of it is this little rectangle in the middle which is the amount of money that the government has collected in tariff revenue. Okay? So, the government is charging those foreign producers some money as they export the good and they're collecting that money. And if the government is honest, it picks up that money, it spends it again on the consumer. So, that's neutral. We don't care. But these two little triangles which you can see here and here disappear. Okay? And again, this is magic. This is black magic, if you will. From interference with trade, we gain those little triangles before. You remember? Because we were using the world's resources more efficiently. Now, because we impose a tariff, we lose those triangles. They evaporate into thin air. Nobody gets them and therefore, national welfare is reduced because we have given up those gains that we got from using the world's resources more efficiently. From being able to have access to them at the world price, we've given them up so that the producer gets some more surplus and we can bring more of our domestic resources into production so the government can collect the revenue and maybe spend it on roads. But this is gone.
