Question

2) Let us say that the protectionism of the coal industry is in the form of a tariff. Talk on the benefits and costs of a tariff. Do the benefits exceed the costs or vise versa? Ascertain you include the terms of trade. Also, what is an optimal tariff?

Answer 1

Tariff is the taxes imposed on the goods imported from the foreign country. Thus as a result of tariff the price of the imported goods increases. Tariff acts as a protection for the domestic goods against the foreign imported goods by raising the prices of the imported goods , thus making in non - attractive for the domestic buyers.

Benefits of Tariff

• It protects the domestic goods and retailers by increasing the price of the imported goods against the domestic goods.
• It will provide employment opportunities in domestic country to many people as the demand of domestic goods increases.

Costs of Tariff

• It would rise the price of foreign imported goods and thus the demand of foreign goods reduces.
• Moreover, sometimes the country imports the low cost cheaper goods from the foreign nation and making the low cost product available to its residents. Tariff would make such condition impossible.

The costs exceed the benefits as the customers would be at loss as they need to purchase the expensive products now.

The optimal tariff is where the price of the imported goods remain cheaper than the domestic goods.