protectionist policies:tarrifs Flashcards
what is a tariff?
A tariff is a tax on imported goods/services (customs duty)
when would a domestic producer/retailer have to pay a tariff?
Domestic producers/retailers have to pay the tariff when the good/service crosses the border into the country
This raises the cost of production for domestic firms
Firms often pass on the increased costs to consumers in the form of higher prices
These higher prices allow some domestic firms to increase their output (law of supply)
draw diagram for tariffs imposed on imports
diagram analysis
World supply (Ws) is considered to be infinite, and this supply curve is added to the domestic demand (DD) and supply (SD) curves
The pre-tariff market equilibrium is seen at PwQ2
Domestic firms supply up to Q1 at a price of Pw
Foreign firms supply the difference equal to Q1Q2 (the level of imports), at a price of Pw
After the tariff is imposed, the world price increases from Pw to Pw + Tariff
Following the law of demand, the quantity demanded contracts from Q2 to Q4
Following the law of supply, the quantity supplied by domestic firms extends from Q1 to Q3
The new market equilibrium is seen at Pw+tariff Q4
The level of imports is reduced from Q1Q2 to Q3Q4
Domestic producer surplus has increased by area 2
Domestic consumer surplus has decreased by areas 1, 2, 3 & 4
The government receives tax revenue equal to ((Pw+tariff) - Pw) x (Q4-Q3)
This is equivalent to area 3 on the diagram
draw diagram of The Impact of Tariffs on Stakeholders
what are the impacts of tariffs on stakeholders ? domestic producer
Before the tariff domestic producers produced output equal to 0Q1 and their revenue was equal to Pw x Q1
After the tariff was imposed domestic producers produced 0Q3 and their revenue was equal to Pw+tariff x Q3
Domestic producer surplus has increased by area 1
what are the impacts of tariffs on stakeholders ? foreign producer
Before the tariff foreign producers sold output equal to Q1Q2 and their revenue was equal to Pw x (Q2 - Q1)
After the tariff was imposed foreign producers sold output equal to Q3Q4 and their revenue was equal to Pw x (Q4 -Q3)
Foreign producer surplus has decreased by the areas underneath 2 and 4
what are the impacts of tariffs on stakeholders ? domestic consumers
Before the tariff domestic consumers consumed Q2 products at a price of Pw
After the tariff domestic consumers consumed fewer products (Q4) at a higher price of Pw+tariff
Domestic consumer surplus has decreased by areas 1,2 3 and 4
Some consumers have been priced out of the market (contraction of quantity demanded from Q2 → Q4
the gov
After the tariff is imposed the government receives tax revenue equal to ((Pw+tariff) - Pw) x (Q4-Q3)
This is equal to area 3
downstream producers
Other producers who rely on the imported product as a raw material in their own production process, now have to pay more for it as prices are higher
This increases their costs of production
They may have to reduce output which could impact unemployment levels and government tax receipts in their industry
society (welfare loss)
Less efficient domestic firms are now producing at the expense of more efficient foreign producers - there is a welfare loss equal to area 2
Consumers are frustrated with the higher prices and there is no longer allocative efficiency - there is a welfare loss equal to area 4
The net welfare loss is equal to areas 2 and 4
what is the impact of tariffs on standard of living
The standards of living for consumers worsen as the value of their income is eroded as they are paying higher prices
Domestic firms that benefit from increased production may increase employees’ wages
This would increase the standard of living for employees
what is the impact of tariffs on equality
Workers in industries that have been experiencing structural unemployment due to foreign competition will feel that the tariff results in them being treated more fairly
