Hi All, I was just reviewing the diagram associated with protection with the use of a tariff. I'm a little unsure of why the area labelled 'd' is not part of the producer surplus. Am I reading the diagram incorrectly? Thanks much.
The definition of producer surplus (from Module 12) is: Producer surplus is the surplus revenue received over that which is necessary to maintain supply. This is the difference between the price received by producers and the cost of supplying the goods (up to the domestic quantity supplied, Q3). The price received by producers is P(w+t). The cost of supplying the goods is represented by the domestic supply curve. So it's the area between P(w+t) and S(dom) up to Q3. This is just c + g.
Producer surplus (PS) is defined as the total revenue received less that needed to maintain the current quantity supplied. When looking at the market as a whole, it's always equal to the area below the price and above the supply curve. Here, though, we're interested in the costs of a tariff on the domestic economy only and so we only consider the PS for domestic producers and ignore the effects on producers abroad. This is the area below the price and above the supply curve for domestic suppliers. Before the tariff, this is just "g". With the tariff, it's equal to "c+g".
