The united states currently imports all of its coffee. suppose the annual demand for coffee by u. s. consumers is given by the demand curve qequals=240240minus−55p, 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 (equals=average) cost of $66 per pound. u. s. distributors can in turn distribute coffee for a constant $11 per pound. the u. s. coffee market is competitive. congress is considering a tariff on coffee imports of $22 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 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) $7; $205 million

(b) $9; $195 million

(c) $400 million

(d) $390 million

(e) Loss = $10 million

Explanation:

(a) Price paid by consumers when no tariff imposed:

= Marginal cost + Distribution cost

= $6 + $1

= $7

Quantity demanded:

Q = 240 - 5P

   = 240 - 5 × $7

   = 240 - $35

   = $205 million pounds

(b) At imposed tariff of $2 per pound, then the new price paid by consumers:

= Marginal cost + Distribution cost + Tariff

= $6 + $1 + $2

= $9

New quantity demanded:

Q = 240 - 5P

   = 240 - 5 × $9

   = 240 - $45

   = $195 million pounds

(c) Lost consumer surplus:

= ($9 - $7)($195) + (0.5)($9 - $7)($205 - $195)

= ($2 × $195) + (0.5 × $2 × $10)

= $390 + $10

= $400 million

(d) Tax revenue collected by government:

= Quantity demanded under tariff × tariff

= $195 × $2

= $390 million

(e) Tax revenue of $390 million received is less than the value of coffee sold under tariff $400 million.

Loss = $400 million - $390 million

        = $10 million

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