Interactive import-competing market diagram comparing tariffs, quotas and production subsidies
Protection always costs someone. The only question is who gets the bill
An import-competing market has a demand line, a supply line and a flat world price, and imports fill the gap between them. Every protection tool works by moving one of those three things. Raise the tariff and watch the import gap close, then switch to a subsidy and watch what the price does.
Import-competing marketFree trade
Raise the tariff. Watch the import gap and the shaded areas.
Protection tool
Free trade · price $60 · imports 100m
world price Pwimport gapdeadweight losstariff revenueS′ supply with subsidy
Tariff per unit$0
$0 free trade$25$50 no imports
Domestic price
$60
Imports
100m
Total consumer spending
$8,400m
Domestic output
40m units
Domestic producer revenue
$2,400m
Foreign producer revenue
$6,000m
Tariff revenue to government
$0m
Deadweight loss
$0m
The debate
Know This
Tariffs, quotas and subsidies all raise domestic output and shrink imports, but a tariff or quota makes consumers pay a higher price while a subsidy keeps the world price and sends the bill to taxpayers.