Question

Imagine that you are an economic adviser on trade for the government of Country X. A trade partner, call it Country Y, has just raised tariffs on your exports to Country Y. You are told that your country will be responding with tariffs of their own. Two of the largest imports to Country X from Country Y are unfinished timber ()wood and candy. Which of these two goods would you tell the government to put a tariff on? Why? If you had the opinion of imposing a quota instead of a tariff, would you switch to the quota or stick with the tariff. Why?

Answer 1

I would suggest the government to impose tariff on candy. This is because it is a final good which is to be directly consumed by the population and doesn't impact the production of other goods. Rather, reduced candy consumption plays to the benefit of health of the population and provides protection to domestic producers. Unfinished wood on the other hand is an intermediate good and imposing tariff on it would hamper supply of other domestically produced goods and even raise their prices. Hence, candy would be the preferred option for tariff imposition.

Tariffs and quotas both have similar distortion effects and carry dead weight losses. However, if there had to be a selection, then tariff would be preferable as it provide government revenue besides reducing import quantity. Furthermore, it is easier to impose tariff because alloting import quota is an arbitrary task and may give rise to favouritism and corruption.

Thanks!