Tariffs, quotas, subsidies and their impact

Types of protection

• Tariff: a tax on imports (specific, per unit, or ad valorem, a percentage).
• Quota: a physical limit on the quantity of imports. No revenue unless licences are sold; the price rises because supply is restricted, and foreign firms holding licences gain the higher price.
• Non-tariff barriers: product standards, complex customs procedures, licensing, 'buy domestic' rules for government purchases, embargoes.
• Subsidies to domestic producers: lower their costs so they can compete with imports; cost the government money but do not raise consumer prices.

The tariff diagram in words

Draw domestic demand (D) and supply (S). The world price Pw is a horizontal line below the domestic equilibrium; at Pw domestic firms supply Q1, consumers buy Q2 and imports are Q2 - Q1.

A tariff raises the price to Pw + t. Domestic supply rises to Q3, demand falls to Q4, imports shrink to Q4 - Q3.

• Consumer surplus falls by the whole area between the two prices, left of demand.
• Producer surplus rises by the area between the prices, left of supply.
• Government revenue = t x (Q4 - Q3).
• Two triangles are deadweight loss: the production triangle (high-cost domestic output replacing cheaper imports) and the consumption triangle (consumers priced out).

Demand Qd = 100 - 10P, supply Qs = 10P - 10 (thousands of units)

Impact on different groups

• Consumers: higher prices, less choice; the poor lose most if the goods are necessities, so protection can worsen equality.
• Domestic producers: higher prices and output; less pressure to be efficient.
• Foreign producers: lower sales.
• Government: tariff revenue (a subsidy costs money instead).
• Living standards: deadweight losses and retaliation reduce real incomes overall, though some protected workers gain.
• The world: less specialisation, possible trade wars.

Worked example

Using the table (thousands of units), calculate the tariff revenue and the deadweight loss of the $1 tariff.

1. Imports with tariff = 50 - 40 = 10; revenue = $1 x 10 = $10k
2. Production triangle = 0.5 x 1 x (40 - 30) = 5
3. Consumption triangle = 0.5 x 1 x (60 - 50) = 5

Answer: Revenue $10k; deadweight loss $10k

Check yourself

1. Using the lesson's table, by how many thousand units do imports fall when the $1 tariff is imposed?
   Show answer

   20. 30 - 10 = 20 thousand.

2. Using the lesson's table, calculate the loss of consumer surplus from the tariff in $ thousand.
   Show answer

   $55 thousand. Trapezium between the prices: (60 + 50) / 2 x 1 = 55.

3. Using the lesson's table, calculate the gain in producer surplus in $ thousand.
   Show answer

   $35 thousand. (30 + 40) / 2 x 1 = 35.

4. World price $10; at this price domestic demand is 500 units and domestic supply 200. A $2 tariff raises domestic supply to 260 and cuts demand to 440. Calculate tariff revenue.
   Show answer

   $360. Imports = 440 - 260 = 180; revenue = 2 x 180 = $360.

5. In the previous question, calculate the total deadweight loss.
   Show answer

   $120. 0.5 x 2 x 60 + 0.5 x 2 x 60 = 60 + 60 = $120.

6. How does a quota differ from a tariff?
   • It is a tax on imports
   • It limits the quantity of imports and raises no revenue unless licences are sold
   • It lowers the domestic price
   • It is a payment to domestic producers
   Show answer

   It limits the quantity of imports and raises no revenue unless licences are sold. A quota is a quantity limit.

7. A subsidy to domestic producers differs from a tariff because it
   • raises government revenue
   • reduces domestic output
   • is illegal under all trade rules
   • does not raise the price consumers pay
   Show answer

   does not raise the price consumers pay. The subsidy shifts domestic supply right; the price stays at the world price, but taxpayers pay.

8. Explain why a tariff on basic foods may increase inequality.
   Show answer

   Tariffs raise prices, and low-income households spend a larger share of their income on basic food, so they lose a larger proportion of their income than the rich (a regressive effect).. Price rises on necessities hit the poor hardest relative to income.

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Sources

• Pearson Edexcel International Advanced Level in Economics specification (issue 2)

Last updated 8 November 2026. Spotted a mistake? Tell us.