Trade Tariff- Detailed Analysis Flashcards
(20 cards)
What is a tariff?
A tax on imported goods, usually expressed as a specific amount per unit or a percentage of value.
Immediate effect of a tariff on the world price faced by domestic consumers?
Domestic consumers now pay the world price + tariff (Pw → Pw + t), so the domestic price rises by the amount of the tariff.
How does a tariff affect the quantity demanded domestically?
Higher price → contraction along the domestic demand curve → quantity demanded falls from Qd₀ to Qd₁.
How does a tariff affect domestic supply?
Higher price encourages domestic producers to expand output → quantity supplied rises from Qs₀ to Qs₁.
What happens to the volume of imports after a tariff?
Imports shrink from (Qd₀–Qs₀) to (Qd₁–Qs₁).
Change in consumer surplus due to a tariff (diagram analysis)?
Falls by the area: A + B + C + D (large loss because price rises and quantity falls).
Change in producer surplus due to a tariff?
Rises by area A (higher price & larger domestic output).
Government revenue from the tariff (diagram area)?
Rectangular area C = tariff per unit × post‑tariff import quantity.
Deadweight welfare loss created by a tariff?
Triangular areas B + D (losses not offset by gains elsewhere: B = production distortion, D = consumption distortion).
Overall national welfare effect of a small‑country tariff?
Net welfare falls by B + D; the country is worse off because consumer loss exceeds producer gain + tax revenue.
Why does a tariff cause ‘production distortion’ (area B)?
Resources shift into less efficient domestic industries that only expand because of artificial price support, wasting resources.
Why does a tariff cause ‘consumption distortion’ (area D)?
Some consumers are priced out of the market even though society could have obtained those units at the lower world cost.
Effect of a tariff on domestic producer revenue (not surplus)?
Revenue rises from Pw × Qs₀ to (Pw + t) × Qs₁.
Impact of a tariff on foreign exporters in a ‘small‑country’ case?
They sell fewer units (lower volume), but receive the same world price Pw (the tariff is paid by importers/consumers).
Two main arguments often used to justify tariffs
- Infant‑industry protection 2. Preventing dumping / unfair competition.
Two main criticisms of tariffs
- Consumer prices rise and variety falls 2. Retaliation risk & trade wars reduce overall welfare.
How does an import quota differ from a tariff in welfare terms?
Both restrict imports, but quota rents go to licence holders (often foreign firms), whereas tariff revenue goes to the government.
What is ‘effective rate of protection’?
A measure that accounts for tariffs on both final goods and intermediate inputs, showing the tariff’s true protection for domestic value‑added.
Explain how a tariff can improve a large country’s terms of trade
By reducing demand for imports, world price Pw may fall; part of the tariff burden shifts to foreign exporters—possible net gain if terms‑of‑trade effect > deadweight loss.
WTO rules on tariffs
Members bind tariffs at agreed maxima and commit to non‑discrimination (MFN clause), but may use emergency ‘safeguard’ tariffs under strict conditions.
