Suppose Canada has a 20% tariff on the import of carpets, and Canada currently imports this product from India at a with-tariff price of $22. The with-tariff price of identical carpets from the United States is $24. Now suppose a free-trade agreement with the U.S. eliminates the tariff and so the no-tariff price from the U.S. is $20. Canada now purchases carpets from the U.S. Is Canada made better off from this trade diversion?
◦ Yes, because Canadian consumers are paying less for carpets and consumer surplus has increased.
◦ No, because before the agreement Canada was buying from India at a lower (pre-tariff) price and collecting tariff revenue.
◦ No, because it would still be cheaper for individual consumers to buy carpets from India.
◦ Yes, because Canada has diverted trade toward the United States.
◦ Canada is not better or worse off. The gain in consumer surplus in Canada is identical to the loss in tariff revenue to the Canadian government.
Passage of the “Tariff of Abominations,” 1828
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Use the product rule to find derivative
To find the derivative use product rule
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