The United States currently imports all of its coffee. The annual demand for coffee by U.S. consumers is given by the demand curve Q = 250 l0P, where Q is quantity (in millions of pounds) and P is the market price per pound of coffee. World producers can harvest and ship coffee to U.S. distributors at a constant marginal (= average) cost of $8 per pound. U.S. distributors can in turn distribute coffee for a constant $2 per pound. The U.S. coffee market is competitive. Congress is considering a tariff on coffee imports of $2 per pound.
a. If there is no tariff, how much do consumers pay for a pound of coffee? What is the quantity demanded?
b. If the tariff is imposed, how much will consumers pay for a pound of coffee? What is the quantity demanded?
c. Calculate the lost consumer surplus.
d. Calculate the tax revenue collected by the government.
e. Does the tariff result in a net gain or a net loss to society as a whole?
a) If there is no tariff then consumers will pay $10 per pound of coffee, which is found by adding the $8 that it costs to import the coffee plus the $2 that it costs to distribute the coffee in the U.S. In a competitive market, price is equal to marginal cost. At a price of $10, the quantity demanded is 150 million pounds. b) Now add $2 per pound tariff to marginal cost, so price will be $12 per pound, and quantity demanded is Q = 250 10(12) = 130 million pounds. c)…
Lost consumer surplus is (1210)(130) 0.5(1210)(150130) = $280 million. d) The tax revenue is equal to the tariff of $2 per pound times the 130 million pounds imported. Tax revenue is therefore $260 million. e) T here is a net loss to society because the gain ($260 million) is less than the loss ($280 million).