Tariff

The classic item shows a small-country import market and asks you to label the welfare areas after a tariff. The “tell” is that a small country is a price-taker, so the domestic price rises by the full tariff (world price plus the tariff). Drill the two deadweight-loss triangles: a production-efficiency loss (higher-cost domestic output replaces cheaper imports) and a consumption-efficiency loss (buyers priced out). The trap is the government-revenue rectangle — it’s the tariff times the post-tariff (reduced) import quantity, not pre-tariff imports, and it’s a transfer, not a loss. A large country can improve its terms of trade, so its net effect is ambiguous; small-country tariffs are unambiguously welfare-reducing.

Distinguish a tariff from a quota: a tariff hands the rectangle to the government, whereas an equivalent quota lets foreign exporters or license-holders capture the quota rents (the government gains only if it auctions the licenses). Don’t confuse this lost consumer surplus with the surplus/shortage disequilibrium of a binding price floor or ceiling — a different concept. Memory hook: tariffs tax, quotas quantity-cap.