Suppose the demand for steel is P=720-8Qd and the supply of steel is P=360+8Qs. The home country is small in the world steel market and the world price of steel is $400.
a. Find the free trade levels of steel production and consumption as well as steel imports.
b. Now suppose that a 20% tariff on steel imports is imposed to protect domestic steel producers. Find the equilibrium quantities of steel production, consumption and imports. What is the government’s revenue from the tariff? Show on the graph the effect of the tariff on consumer surplus and producer surplus. Show on the graph the dead-weight loss resulting from the tariff.
c. Next suppose that a group of automobile producers begins a lobbying and public relations campaign that points out that the tariff hurts steel consumers like themselves (suppose that auto firms import 7.5 units when the tariff is 20%). A compromise is reached that allows 5 units to be imported (by auto firms) at a tariff of 10% with any additional imports subject to the original tariff of 20%. Determine the effect of this change on the price of steel at home, on domestic production and consumption. What is the effect on tariff revenue? (Hint: Draw the total supply curve.)