Draw a domestic supply-and-demand diagram for a product in which the United States does not have a comparative advantage. What impact do foreign imports have on domestic price and quantity? On your diagram show a protective tariff that eliminates approximately one-half of the assumed imports. What are the price-quantity effects of this tariff on (a) domestic consumers, (b) domestic producers, and (c) foreign exporters? How would the effects of a quota that creates the same amount of imports differ?

The US does not have a comparative advantage on the product; the world price will be lower than the domestic price. The domestic demand and supply represent the world price below:

The world price will be P_w' and the domestic price will be P_d. The domestic demand will be higher than the equilibrium quantity; the quantity demand increases from Q_x to Q_z. The domestic supply falls from Q_x to Q_u. The import demand will be Q_uQ_z.

A tariff is a tax that is imposed by the country on the goods imported. The tariff imposed by the domestic government to safeguard the domestic producer and the tariff will P_wP_t.

1. The domestic consumers will be worse off as the price of the product increase from P_w to P_t, and the quantity demand falls from Q_z to Q_y.

2. The domestic producers will be better off after the tariff as the domestic price increases; the domestic supply increases from Q_u to Q_y.

The foreign exporter will be worse off as the export quantity decrease from Q_uQ_z to Q_xQ_y.

Quota is a restriction on the amount of quantity to be imported; the importing government puts a restriction on the import quantity. If the government sets a quota of Q_vQy_y, then the effect will be the same as a like tariff. The domestic government will not earn any revenue from the tariff; these revenues will go to the foreign producer.