Question

Explain, the effects of a tariff in a large vs. a small importing economy.

Answer 1

Effect of Tariff on small importing economy

A tariff on imports lowers consumer surplus and increases producers' surplus on the import market. A small-country import tariff has no effect on international buyers, manufacturers or national welfare. The effect of an import tariff on national welfare is calculated as the amount of the producer and consumer surplus and the effects of government revenues. An import tariff of any size will result in losses of deadweight and will reduce the output of production and consumption. When a small country implements an import tariff, national welfare drops.

Effect of Tariff on large importing economy

Tariffs are contributing to a decline in imports. Hence the price for consumers does not rise as much as for a medium economy Smaller reduction in market surplus Therefore the price for consumers does not rise as much as for a small economy As a result of the tariff, buyers of the drug in the importing country are worse off. The rise in the domestic price of both imported products and domestic alternatives decreases demand surplus in the market As a result of the tariff, producers in the importing country are better-off. The increase in their product's price increases industry producer surplus. The price rises also induce an increase in the output of existing firms (and possibly the addition of new firms), an increase in employment and an increase in profit and/or payments at fixed cost.