A Homework Problem from China

Chapter 9 of my favorite textbook presents the standard analysis of a tariff (a tax on imports) and shows that it reduces economic welfare as measured by the sum of producer surplus, consumer surplus, and tax revenue. Even though the tariff makes domestic producers better off and raises some revenue for the government, these gains are more than offset by losses to consumers, leading to a deadweight loss.

This news story suggests a good homework problem extending the analysis:

China, the world's biggest grain producer, will tax exports of wheat, corn and rice to increase domestic supply and control rising food prices. Exporters of wheat will start paying a 20 percent tax on Jan. 1, while the tax for corn and rice was set at 5 percent, the Finance Ministry said.

Draw the graph that describes the market for grain in an exporting country. Use your graph to answer the following questions.

1. How does an export tax affect domestic grain prices?
2. How does it affect the welfare of domestic consumers?
3. How does it affect the welfare of domestic producers?
4. How does it affect government revenue?
5. What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?