What you are actually watching
The comparative advantage simulator on this site argues that trade creates gains. This one
measures what restricting it costs, and to whom. The two belong together, because the second
is where the political argument actually happens.
The tariff is paid at home
The most common misunderstanding about tariffs is who writes the check. A tariff is a tax
collected by the importing country's government, and the foreign exporter is not charged
anything by it.
Because this country is small enough that its purchases do not move the world price, the
entire tariff shows up as a higher domestic price. Buyers pay more on every unit,
including the ones made at home, which were never subject to the tariff at all. Domestic
producers can raise their prices simply because the imported alternative got more expensive.
Load the free trade preset and then the modest tariff to see it happen. Under
free trade the domestic price and the world price are the same line. The moment a tariff
appears, they separate by exactly its amount, and everything between them is the cost of the
policy to somebody.
Four pieces, and only two of them land somewhere
Consumers lose the entire shaded region, which is a fall in consumer surplus:
the value buyers were getting above what they paid. That loss then splits into four pieces,
and keeping them separate is what the diagram is for.
Area a is a transfer to domestic producers. Nothing is destroyed here, the
money simply changes hands from buyers to sellers. Area c is what the
government collects on the imports that still arrive, which funds spending or lets some other
tax be lower. Both are redistribution, and whether they are good or bad depends on what you
think of the recipients.
Areas b and d are different in kind. Nobody receives them. Area b is
resources burned making units at home that cost more than buying them abroad, which is real
labour and material spent for no gain. Area d is purchases that simply stop: buyers who
valued the good above the world price, and who would happily have bought it, now do not.
Together they are the deadweight loss, and they are the honest cost of the
policy.
Why doubling the tariff more than doubles the damage
Step through the modest, steep and prohibitive presets and watch the wasted amount. It does
not rise in step with the tariff, it accelerates.
The reason is geometric. Both b and d are triangles, and raising the tariff makes each one
taller and wider at the same time. A tariff twice as large produces roughly four
times the waste. Small tariffs are cheap and large ones are disproportionately expensive,
which is a useful thing to know before arguing about the level.
The tariff that raises nothing
Load the prohibitive preset. Imports have stopped completely, the domestic price has climbed
all the way back to where it would sit with no trade at all, and government revenue is
zero.
This is worth sitting with, because tariffs are often defended on two grounds at once:
protecting an industry and raising money. Those goals pull against each other. The more
effectively a tariff blocks imports, the less there is left to collect on. At the extreme
the protection is total and the revenue is nothing.
A quota looks identical until you ask who gets paid
Switch to the quota and set the cap to 30 units. The price, the domestic production, the
consumption and the deadweight loss all match the $4 tariff exactly. On the diagram they are
indistinguishable.
The difference is area c. Under a tariff the government collects it. Under a quota it becomes
a rent: the right to sell into a protected market at an inflated price is
worth money, and it goes to whoever holds the import licenses.
Now toggle the rents to foreign exporters and watch the national loss jump. This is not a
hypothetical. An arrangement where a country asks its trading partner to limit its own
exports hands those rents straight to the foreign firms, which makes it more expensive for
the importing country than the tariff it replaces, while looking politically softer.
What this model leaves out
The small country assumption does real work here. A large importer can push the world price
down by buying less, which shifts part of the burden onto foreign sellers, and in principle
such a country can improve its own position with a moderate tariff at the rest of the
world's expense. That case is real, it has a name (the optimal tariff), and this diagram
does not show it.
There is also no retaliation, and trading partners generally do retaliate, which removes the
gain and leaves both sides worse off. Nothing here captures infant industry arguments, where
temporary protection might allow an industry to reach a scale it could not otherwise, nor
national security reasons for making something domestically at any cost. There is no
modelling of the adjustment itself: the diagram treats displaced workers as instantly
re-employed, which is exactly the assumption that makes trade economics feel remote from the
towns where the factories closed.
The honest summary is that this measures the size of the pie. It does not tell you whether
protecting a particular group of people is worth paying for. That question is real, and it
is not one a diagram can settle.
Things to try
Each takes a few seconds and lands something the argument usually skips.
1Watch revenue peak and collapse
Raise the tariff from $0 to $7 a dollar at a time and follow area c. It climbs, turns
over, and reaches exactly zero when imports stop.
2Confirm the squaring
Note the wasted amount at a $2 tariff, then at $4. It roughly quadruples rather than
doubling, because both triangles grow in both directions.
3Make the quota expensive
Switch to a 30 unit quota, then move the rents from home to foreign exporters. Same
price, same imports, and a materially larger loss to the country.
4Protect an industry that cannot respond
Drop producer response to 1 and apply a tariff. Domestic output barely moves, so almost
the entire cost falls on buyers for very little protection delivered.
5Find where trade stops mattering
Raise the world price toward the no-trade price. Imports shrink on their own and a
tariff has less and less to bite on.
6Compare against the gains from trade
Open the comparative advantage simulator alongside this one. That page measures what
trade creates, and this one measures what blocking it destroys.
Common questions about tariffs
Who actually pays a tariff?
Domestic buyers, mostly. A tariff raises the price inside the country, so households and firms that use the good pay more for every unit, including the units made domestically that were never subject to the tariff. The foreign exporter is not charged anything by the importing country's government. For a country too small to move the world price, buyers at home bear the entire increase.
Why is a tariff a net loss if some of the money comes back?
Because only part of it comes back. What consumers lose splits into four pieces: a transfer to domestic producers, revenue collected on the imports that still arrive, and two triangles that nobody receives at all. Those triangles are resources spent producing at home what could have been bought more cheaply abroad, plus purchases that simply stop happening. That residue is the deadweight loss, and it is the true cost of the policy.
What is a prohibitive tariff?
One high enough that imports stop entirely, which happens once the domestic price has been pushed all the way to where it would sit with no trade at all. Beyond that point, extra tariff changes nothing. It also collects no revenue whatsoever, because there are no imports left to tax, which makes it simultaneously the most protective and the least fiscally useful setting available.
Is a quota the same as a tariff?
In this model a quota can produce exactly the same domestic price, the same domestic production, the same consumption and the same deadweight loss. The difference is the money collected on imports. Under a tariff the government keeps it. Under a quota it becomes a rent for whoever holds the import licenses, and if those licenses sit with foreign exporters, the money leaves the country and the national loss is correspondingly larger.
Do tariffs protect jobs?
They protect jobs in the industry receiving the protection, and the diagram shows domestic production rising. What it also shows is the cost: higher prices for every buyer, including firms that use the good as an input and whose own competitiveness falls as a result. The model measures the size of the pie rather than deciding whether protecting a particular group is worthwhile, which is a political question rather than an economic one.
What does the small open economy assumption change?
It means the country buys too little of the good to move the world price, so the entire tariff lands on the domestic price. A large importer can instead push the world price down by buying less, shifting part of the burden onto foreign sellers, and in principle an optimal tariff can improve its own position at the rest of the world's expense. That case is real and well established, but it is not what this model shows.
If tariffs are so costly, why are they so common?
Because the costs and benefits are distributed very differently. The gain is concentrated on a visible industry whose workers and owners know exactly what they stand to lose, while the loss is spread thinly across every buyer in the country, most of whom will never notice a few cents on a purchase. Concentrated benefits and diffuse costs is a reliable recipe for a policy that persists regardless of what the arithmetic says.