4.c Imports and Protectionism

Figure 4.c.1

Figure 4.c.1 shows how to use consumer surplus and producer surplus to analyze the costs and benefits of allowing imports into a country. With no imports, equilibrium occurs at the intersection of the demand curve and the domestic supply curve. Price is $12 and quantity is 10. Consumer surplus is given by area A (yellow) while producer surplus is equal to areas B+D (green and purple). If imports are allowed, the increase in supply reduces price to $9 and raises quantity to 14. Consumer surplus will now be the area below the demand and above the price of $9--areas A+B+C (yellow+purple+blue). Thus consumers gain areas B+C because of imports. Domestic producers lose because of the imports. With the price at $9, domestic producer surplus is area D (green). This means domestic producer surplus has fallen by area B (purple). Overall, the benefits of imports are equal to the consumers' gains, or areas B+C. The costs of imports equal the sellers' loss, area B. Thus, consumers gain more than sellers lose, and the country as a whole gains area C (blue).