Consumer surplus before tariff: red plus green plus purple plus light
blue plus dark blue
Consumer surplus after tariff: red
(Domestic) producer surplus before tariff: yellow
(Domestic) Producer surplus after tariff: yellow plus green
Government gain from tariff: light blue
Why there is a net national loss: the nation consists of consumers plus
government plus domestic producers. So with the tariff:
-
Consumers lose the green plus purple plus light blue plus dark blue areas
-
Government gains the light blue area
-
Domestic producers gain the green area.
So the green area just passes from consumers to domestic producers, but
is not lost by the nation. The light blue area passes from
consumers to government, but is not lost by the nation. However the
purple and dark blue areas are lost by consumers and not gained by anyone
else, and there are no other gains anywhere else. Hence there is
a net national loss, as there will always be in the small-country case.