7. Your government is considering an import tax on a consumer good (imported). Your team is...

7. Your government is considering an import tax on a consumer good (imported). Your team is assisting the government in evaluating the welfare impact of the tax. You are the head of the team, and your task is to explain to your team members how the small-country or non-small-country assumptions would influence the result.

Expert Solution

A small country means that the share of their imports in the world market. So small that even if the imports are completely wiped out, there won't be any significant change observed in the market. But one must understand that no matter whether our country falls under the category of big or small, when a tax is imposed on the goods imported, the domestic selling prices of these goods increase, implying that the demand of these goods decrease to an extent. In response to this, the level of imports decrease. The only factor here is that, this level of decrease in imports has little to no effect in world price in the case of a small country as against a significant effect in the case of a large country. Ceteris Paribus, the welfare of consumers against high domestic prices are preserved furthermore giving impetus to local vendors to prosper in their business.

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Rahul Sunny answered 9 months ago

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