Economic Tariffs Flashcards
What is a tariff
Import Tariff is a tax in imported goods and services
Export tariff is a tax on exported goods and services
- Practised in developing countries to generate govt revenue and restrict exports
Types of Tax on a tariff
ad valorem tax is a tax that is based on the value of an item. This means that the amount of tax you pay is proportional to the value of the item
Specific Tax - fixed tax per unit
Compound - combination of both
Ad Valorem tax places a proportionately higher tax on expensive goods. This can encourage consumers to switch from expensive alcohol etc to cheaper varieties. A specific tax increases the price of all equally.
Define ‘small country’
One where changes in the domestic market does not alter the international price of the commodity
- Tariff will not deter price
- country acts as ‘price taker’
What is Consumer surplus
The difference between what consumers are willing to pay for a specific amount of a good and what they actually pay
Area under the demand curve and above the price paid on every unit purchased
Deadweight loss for consumers in on the right of the graph
elasticity of supply and demand effect
inelasticity of demand means that demand remains relatively constant even with changes in economic factors. When there are few substitute products demand remains inelastic
inelastic supply means the percentage change in quantity supplied changes by a lower percentage than the percentage of price change. An inelastic example is nuclear power, which has a long lead time given the construction,
Inelastic supply and demand will lead to a smaller DWL
Define a large country
One where the changes in its domestic market does alter the international price of the commodity.
What is the optimum tariff
An optimal tariff is the tariff rate that maximizes the benefit resulting from the imposition of a tariff.
The gain comes from the improvement in the terms of trade.
Positive welfare gains are always possible from tariff imposition in large countries.
How does a tariff affect the world market for a large country
the imposition of a tariff results in a fall in import demand that lowers the international price.
This is known is as the terms of trade effect.
Terms of trade: export price/import price
An improvement in the terms of trade will offset potential DWL
Problems with optimal tariff
By itself, the existence of an optimum tariff appears to be a strong argument for interfering with free trade.
It is important to note that the positive welfare gains exist only if no retaliation in other markets occurs following the imposition of a tariff.
History does not support the no retaliation assumption.
Tariff examples
They were reduced sharply since the end of WW2
Tariffs average 3% of goods on industrial products in developed nations.
Highest tariffs are imposed on clothing and textiles (2014)
Trump Tariff: Washing Machines 2018
Rate of effective protection
Country imposes a lower tariff on the import of an input of a final product rather than the finished good
= stimulate domestic production and increase domestic employment
= domestic value added increase
Used by domestic producers to see how well they are protected
Deduces the effective tariff rate
Nominal vs effective tariff
assumes national prices of a commodity are not affected by tariffs and inputs are used in fixed proportions
Optimum tariff process
welfare will decrease once tariff is past optimum, nation is pushed towards autarky point.
- Could be problems with trade partners as their terms of trade deteriorate = retaliate and apply their own optimum tariff
If the process of retaliation continues all nations may loss all gains from trade
Even without retaliation gains from tariff-imposer are less than loses of trade partner so the world is worse off due to the loss from selling fewer goods.
Free trade maximises welfare
Optimum tariff curve
If foreign export supply curve is steep there is little response to quantity supplied so the elasticity is low.
Optimal tariff = 1/ E*x
For small country elasticity of foreign export supply is infinite hence there is no optimal tariff.
For large country a steep foreign supply export elasticity curve means foreign exporters will lower their price in response to tariff taking on a large share of tariff burden.
Home country obtains a larger terms of trade increase.
prohibitive tariff
Tariff set so high no trade in the good concerned can take place, important to know when welfare is decreasing between optimal and prohibitive.
Free trade welfare benefits will always outweigh welfare of prohibitive tariff
