Chapter 8
Analysis of a Tariff
Objectives of the Chapter
This chapter analyzes the advantages and disadvantages of tariffs. Except for some recognized exceptional cas, there is a rare connsus among economists that freer trade is better than protectionism. As illustrated in this chapter, economic analysis has consistently demonstrated that there are usually net gains from freer trade for the nation as well as for the world. A tariff helps importsubstituting producers, and the government collects some tariff revenue (import taxes); however, consumers of the good are unambiguously harmed.
Whether or not a tariff will result in a net gain for the importing country will depend on the size of that country. If the country levying the tariff is small (meaning that its actions cannot affect the world price of the good on which the tariff is levied), then the loss to con
sumers is larger than the sum of gains to producers and to the government. On the other hand, if the country is large (meaning that, by limiting imports, it can force down the world price of the good), then levying a tariff may result in a net gain for the country. This will depend upon the portion of the government’s revenues that are, in esnce, extracted from foreign producers versus the size of the country’s deadweight loss from the tariff. In any ca, the world as a whole always los from the imposition of a tariff.
After studying Chapter 8 you should be able to identify
1. the advantages and disadvantages of a tariff.
2. how a tariff lowers the welfare of the world as a whole.
3. ad valorem tariffs versus specific tariffs.
4. the effective rate of protection.
5. how demandsupply analysis can be ud to asss the gains and loss of a tariff, using both graphical and tabular expositions.
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Important Concepts
Ad valorem tariff: A tariff that is t as a percentage of a value of a good when it reaches the importing country.
Consumption effect: The welfare loss to consumers in the importing nation that corresponds to their being forced to cut their total purchas of a good as a result of the tariff.
偏见英文Deadweight loss: Consumer loss from a tariff that accrues to neither the government nor producers.
Effective rate of protection: The percentage by which the entire t of a nation’s trade barriers rais the industry’s value added per unit of output. (This term is abbreviated p.)
Nationally optimal tariff: A tariff t at the rate that maximizes the gains for a large co
untry (at the expen of foreign countries). Technically, the optimal rate, as a fraction of the price paid to foreigners, equals the reciprocal of the elasticity of supply of a country’s imports.
英语学习软件推荐Pricetaking countries: “Small” countries that cannot affect the world price of the goods and rvices they trade. In the countries, the import supply curve is infinitely elastic.
Production effect: The cost of shifting to more expensive domestic production from an importcompeting ctor that is protected by a tariff on foreign goods.
arrowheadProhibitive tariff: A tariff t so high that it reduces imports to zero.
Specific tariff: A tariff stipulated as a money amount per physical unit of the import.
World Trade Organization: An international organization of most of the world’s countries; it overes governmental policies regarding international trade. The chief purpos of the WTO are to liberalize trade and limit unfair export policies such as subsid福五鼠主题曲
ies.
Warmup Questions
True or Fal? Explain.
1. T / F Free trade is always a better policy than a tariff.
2. T / F An advantage of a specific tariff is that its protective value keeps pace with increas in the price of the imported good.
3. T / F While a tariff may be nationally optimal, it is not globally optimal.
4. T / F Ad valorem is just another way of saying ad nauam.
5. T / F A tariff always results in loss to a country’s consumers in excess of the gains to its producers.
Multiple Choice
1. The optimal tariff for a small (pricetaking) country
A. is zero.
turpanB. is a prohibitive tariff.
C. is unambiguously positive.
D. increas as that country’s elasticity of demand increas.cant take my eyes off you
2. An optimal tariff that yields a net national welfare gain requires that
A. the nation be a “price taker.”
B. there be no loss of consumer surplus.
C. trading partner nations not be injured by the tariff.
reformD. the nation has monopsony power in the international market.
3. The imposition of a tariff
A. generates revenue which is paid entirely by foreigners.
B. always increas the domestic price in the exporting country.
C. reduces the welfare of a “small” importing country relative to free trade.
D. is always welfareincreasing.
4. The effective rate of protection of an industry is
A. always larger than the optimal tariff.
低回B. a measure of the jobs gained by the economy imposing a tariff.
英语机构加盟C. more or less than the nominal tariff rate, depending on the domestic output’s share in GDP.
D. more or less than the nominal tariff rate, depending on the tariffs on inputs.
5. The imposition of an import tariff by a large nation
A. increas the nation’s welfare.
