Question

1. Rent Seekers in the domestic Shirt industry have requested that the government place a $2.00 per item Tariff on imported Shirts. Describe and explain the winners and losers from this action. A diagram would assist your answer here and attract further marks.
2. In general why would Governments place Tariffs on any items? What could be the impact of such Tariff actions by Governments?
3. How might a Tariff on a large volume high value imported item affect the supply and demand for Australian dollars? A diagram would assist your answer here and attract further marks.

Answer 1

a. The above diagram depicts the case of tariff imposition in imported shirts. Let the workd price be P* where Q1 Q2 represents the amoun to imports of the nation. When a tariff of $2 is imposed, then the price line will shift up to P'+t and the amount if imports are reduced to Q3Q4. Due to increase in the price of the good, the level of consumer surplus has decreased in the market and amount of producer surplus has increased in the market, even though total surplus has decreased because of the deadweight loss caused by the tariff. Thus, winners are producers whereas consumers are the losers in this trade. Since government also earns revenue from the tariff , the red shaded area represents government revenue and thus government is also winner in this trade.

b.Government place tariffs on some items to earn revenue from the tariff. Earning tariff is the first and foremost priority of the government. On the other hand, government also want to favor domestic producers and infant industries through their actions who are able to increase their sales because demand for imported goods decreases which is compensated using domestic goods.

c. Due to tariff, demand for foreign currency decreases and demand for Australian currency which is the domestic currency will increase. This increase in the demand of the domestic currency, will lead to appreciation of currency in terms of foreign currency. In the diagram above the demand curve has shifted rightwards because of the change.