Trade Tariffs

Question 1

What is an import tariff?

Answer 1

• a tax (or duty) on imported goods or services

* most common tariff and most likelyy to have welfar effects

Question 2

What is an export tariff?

Answer 2

a tax on exported goods or services.

Question 3

Where are export tariffs usually seen?

Answer 3

• Rarely seen in developed countries

* Occasionally practiced in developing countries to generate government revenue, and/or restrict export

Question 4

What are some non-tariff barriers?

Answer 4

Quota, subsidy and etc

Question 5

What is an Ad Valorem tariff?

Answer 5

A fixed percentage tax on the traded commodity e.g. car tax of 20% of the car value

Question 6

What is a specific tax?

Answer 6

A fixed tax per unit of a traded commodity-not related to the value of the product e.g. £1000 tariff on any car

Question 7

What is a compound tariff?

Answer 7

A combination of an ad valorem and specific tariff

Question 8

What do the implications of a tariff depend on?

Answer 8

• Nature of the country

* Whether it is small or large

Question 9

What is a small country in terms of trade?

Answer 9

• Changes in its domestic market do not alter the international price of the commodity
• Therefore, the imposition of a tariff does not alter the international price
• Country acts as a “price-taker” in the international market

Question 10

What is a large country in terms of trade?

Answer 10

• Changes in its domestic market do alter the international price of the commodity.
• This means that the imposition of a tariff does alter the international price.

Question 11

How can the effects of a tariff be seen graphically?

Answer 11

The effects of a tariff are easily seen in a market supply and demand diagram

Question 12

What are the effects on a small country if the international price is lower than the market clearing autarky equilibrium price?

Answer 12

• the country will be an importer of the item

* production will decrease domestically and consumption will increase due to the imports

Question 13

What are the effects on a small country that imports a

product when an ad valorem tariff is placed on imports?

Answer 13

• Domestic price rises on those imports
• Domestic production increases
• Demand decreases
• Imports fall
• the government will begin collecting tariff revenue in this market (additional tariff price X import quantity)

Question 14

What concepts are used to show welfare changes of a tariff?

Answer 14

consumer and producer surplus must be considered

Question 15

what is the consumer surplus?

Answer 15

• the difference between what consumers are willing to pay for a specific amount of a commodity and what they actually pay for it.
• consumer surplus is the area under the demand curve and above the price paid on every unit purchased.

Question 16

What is the producer surplus?

Answer 16

•The extra payment received by producers above what needed to have been paid to cause them to produce the commodity.
-producer surplus is the area below the price received and above the supply curve on every unit sold.

Question 17

What is the impact on consumer surplus in a small country at autarky, free trade and import tariff?

Answer 17

• consumer surplus is above the equilibrium price in autarky
• This increases in free trade down to international price
• A tariff reduces it by the difference between the international and the tariff price

Question 18

What is the impact on producer surplus in a small country at autarky, free trade and import tariff?

Answer 18

• Producer surplus is below the equilibrium price in autarky
• In free trade, it reduces the surplus to the international price
• With a tariff, the surplus increases again by the difference between the international and the tariff price

Question 19

Explain the overall welfare gains and losses of a tariff in a small country

Answer 19

• Entire region between tariff price and international price is lost by consumers
• The portion of this above the supply curve is gain by producers
• The rectangular area between the supply and demand curve is gained by the government as revenue
• the net welfare result is a loss to society indicated by the deadweight loss regions

Question 20

Why do the effects of a tariff differ for a large country compared to a small country?

Answer 20

• Due to the terms of trade effect

Question 21

What is the terms of trade effect?

Answer 21

• Where the imposition of a tariff results in a fall in import demand that lowers the international price.
• Terms of trade: export price/import price

Question 22

What could happen with a 50% tariff on imports with a large country?

Answer 22

• It could result in a drop of the international price from $20 to $15.
• This takes the tariff price to $22.50 per unit
• production rises to the tariff price
• Consumption falls to the tariff price
• Imports fall

Question 23

Explain the welfare gains and losses of a tariff in a large country

Answer 23

• Entire region between tariff price and international price is lost by consumers
• The portion of this above the supply curve is gain by producers
• The rectangular area between the supply and demand curve and from the tariff price to the new international price is gained by the government as revenue

Question 24

What is the overall net effect of tariff on a large country?

Answer 24

• The net effect is a welfare gain.

* The improvement in the terms of trade more than offsets the potential deadweight loss of the tariff.

Question 25

What impacts the extent of welfare effects?

Answer 25

Elasticity of demand of supply will affect the welfare change

Question 26

What does the drop in international price depend on?

Answer 26

The larger the country, the larger the drop

Question 27

What is an optimum tariff?

Answer 27

An optimal tariff is the tariff rate that maximizes the benefit resulting from the imposition of a tariff (mainly in a large country)

Question 28

Explain optimum tariff

Answer 28

• As you increase a tariff, welfare increases up to the optimum tariff ( terms of trade gain exceeds deadweight loss)
• After the optimum point welfare decreases as terms of trade decreases but still higher than deadweight loss
• Continued tariifs means welfare loss as terms of trade less than deadweight loss
• At this point there is no trade as the tariff is too high
• Between b and B’- welfare is higher than free tarde

Question 29

What is the criticism of optimal tariff?

Answer 29

• positive welfare gains exist only if no retaliation in other markets occurs after the imposition of a tariff.

• history does not support the ‘no retaliation’ assumption
• welfare gains can be offset by the tariffs put on that country’s exports by other countries e.g. trade war

Question 30

What are the other consequences of tariffs?

Answer 30

• Retaliation
• Lack of innovation
• Reduced economies of scale

Question 31

explain the innovation consequence of a tariff?

Answer 31

• Tariffs reduce competitive pressures on domestic firms

* Therefore their incentives to innovate and improve the quality of existing products

Question 32

Explain the economies of scale effects of a tariff?

Answer 32

• Each country rather than specialissing, makes small quantities of all goods to satisfy domestic customers
• By not producing large amounts of one good, there is less economies of scale
-so cost of tariffs may be higher in industries with economies of scale