Effect of an Oil Import Tariff

Suppose the US government becomes concerned about the amount of money being spent on imported oil and decides to reduce imports via a tariff. Imagine that you are asked to do a quick, preliminary analysis of the tariff and its effects. You've got the following information available:

• US oil consumption is about 21 million barrels per day;
• US oil production is about 9 million barrels per day;
• No tariff is currently in place and the price of oil is $60 per barrel;
• The elasticity of demand for oil in the US is about -0.1;
• The elasticity of domestic supply is about 0.1.

The consumption, production and price figures are actual data from the last few years; the two elasticities are values that would be roughly true in the short term (long term values would be higher).

You should do all calculations requested below for one day's worth of oil (eg, working with 12M, 9M and 20M) until the very end of the problem, where you will be asked to scale your results up to a full year.

1. Suppose the government imposed a $30 tariff on oil imports.  Assuming that the supply of imported oil is perfectly elastic at $60 per barrel, calculate the new values of US production, US consumption, and the quantity of imports.  How much do imports decrease?  What is that as a percent of initial imports? 
2. Given the results from part (1), calculate the change in consumer surplus, producer surplus, and government revenue.  If applicable, calculate the deadweight loss.
3. Now scale your tariff revenue results from part 2 up to a full year (simply by multiplying them by 365).  To put that number in perspective, in 2005 the US government spent about $35B on international affairs (the State Department and foreign aid), about $98B on education, training, employment and social services, and about $495B on national defense.
4. Suppose the policy had been a $30 tax rather than a $30 tariff.  How would the daily results change?  What would happen to the amount of revenue raised over the course of a year?

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