Question

Discuss (with full explanation) the effects of tariffs on consumption, production and trade.

Q2: Critically examine the economic arguments for government intervention in international trade. Provide your own views regarding these arguments.

Answer 1

Tariffs are taxes or penalties imposed on imports or exports by the domestic country.It raises the price of goods imported from other countries in order to discourage imports.

# EFFECT OF TARIFF ON CONSUMPTION, PRODUCTION AND TRADE----

The effect of tariff can be explained properly by depicting a graph----

The graph shows initial Equilibrium point E, due to the intersection of domestic demand and supply curves.OP is domestic price while OQ is domestic output.

Under free trade, P' is the world price of goods entering in domestic market.

After imposition of tariff, the import price increases to OP²

*EFFECT OF TARIFF ON CONSUMPTION

Due to tariff imported goods become costlier, so ,the consumers reduce its Consumption.

We find in graph----------:

Before tariff ------- domestic total consumption of goods was OQ⁴

After tariff----- total domestic consumption of total goods = OQ³

Area u in graph represents the residual loss of consumer satisfaction or consumption effect of tariff.

EFFECT ON PRODUCTION

After imposition of tariff ,the domestic producers gain as under free trade, people were buying more imported goods ,but after price hike of imports, domastic sale of goods increases.

See the graph------

Before tariff-- domestic sale of goods was OQ¹

After tariff -- domestic sale of goods =OQ²

Increase in domestic sale of goods = Q¹Q²

EFFECT ON TRADE------

Initially under free trade, the Quantity of goods imported was quite big but after tariff , it reduced.

See graph ----

Imports before tariff ------Q¹Q⁴

Imports after tariff -------- Q²Q³

Reduction in import trade = s+u

Ans --(2)

# Arguments in favour of govt intervention in import trade ------

* Protection to local businesses

* Increase in domestic production and sale of goods and services.

* Helps to reduce trade deficit due to discourage of excess imports.

* Growth of domestic economy.

* No loss of jobs of domestic employees engaged in production

* Restrict imports of unwanted goods( drugs)

* Tax revenue to govt

# ARGUMENTS AGAINST GOVT INTERVENTION IN IMPORT TRADE

* Loss of consumer surplus due to increase in price of Imports.

* It leads to real loss to the economy represented by graph( area s+area u).

* Discourages imports .

* Reduction in foreign Competition leads to deteriorate quality of domestically produced goods.

* Adverse impact on international relations.

* Increase in taxes put burden on consumers.

* Reduces economic growth by reducing availability of quantity of goods and services to Consumers and businesses.

* Reduction in availability of variety of goods

So, in short, there are so many arguments in favour and against govt intervention into imports, still arguments in favour overshadow the arguments against it.

Thank you..