A recurring question puts a horizontal world-price line on the graph — understanding what that line means unlocks tariff, quota, and world-price-shock questions alike.
Why the world price is drawn as a horizontal line
A small economy like New Zealand is a PRICE TAKER on the world market — it cannot influence the world price by changing how much it buys or sells.
This means the world price (Pw) is fixed regardless of NZ's own quantity traded — a horizontal line, not an upward or downward sloping one.
A tariff shifts the effective price domestic consumers pay ABOVE Pw (Pw + tariff), while domestic producers can now profitably supply more, up to the new higher price.
A quota has the SAME price and quantity effect as an equivalent tariff, but the government collects no revenue — the value that would have been tariff revenue instead becomes extra producer surplus or is wasted.
Exam-style A world price rise for a NZ export good The world price for a NZ export rises. Explain the impact on NZ consumers and producers. CONSUMERS: NZ consumers now face the higher world price for a good they also buy domestically, so consumer surplus falls — they either pay more or buy less. PRODUCERS: NZ exporters receive the higher world price for every unit sold, so producer surplus rises, and profitable domestic production increases as it becomes worthwhile to supply more at the higher price. NET EFFECT: NZ as an exporter gains overall (producer surplus gain exceeds consumer surplus loss), which is why exporters actively benefit from a world-price rise even though domestic buyers are worse off. ✓ The horizontal world-price line is what makes this tractable: NZ producers and consumers both face the SAME new fixed price, with opposite effects on their respective surplus.
Tool
Price/quantity effect
Who captures the value
Tariff
Raises domestic price above Pw, restricts imports
Government (tariff revenue)
Equivalent quota
Same price/quantity effect as the tariff
No government revenue — value shifts to producers or license holders
Subsidy
Lowers effective cost to domestic producers
Government bears the cost (a rectangle, not revenue)