Question

Show the effects of the following on welfare for a large and a small country:

a. an import tariff

b. an export subsidy

Answer 1

Welfare effects for a large country on an

Import tariff:-

• Consumers of the product in the importing country suffer reduction in well being as a result of tariff.
• Increase in the price of both imported and domestic products reduces the amount in the market.
• Producers experience an increase in well being.
• Increase in price of products increases producers surplus in the country..
• Increase in output of existing firms.
• Benefits from the revenue.
• Tariff implemented by a large importing country raise national welfare.
• If tariff is high in a large country national welfare will fall.

Positive optimal tariff will maximize national welfare.

Welfare effects of a small country on import tariff:-

• Raise the domestic price by the full value.
• Consumers of the product in the importing country are worse which result in tariff.
• The increase in the price of both imported and domestic products reduces surplus in the market.
• Producers are better off as a result of tariff.

Increase in the price of products increases producer surplus in the industry..

An export subsidy of a large country:-

• Cause an increase in the price of the goods on domestic market and decrease in the price.
• Cosumers of the product in export country decreases in well being as a result of export subsidy..
• Increase in the domestic price reduces the consumer and surplus in the market.
• Producers in exporting country experiences increase in well being.

Market raises producers surplus in the industry..

An export subsidy of a small country:-

• Consumers of the product in importing country experiences increase in well being.
• Decrease in price of imported goods as well as domestic goods increases the rate of surplus in the market.
• Domestic consumer price remains the same
• Producers gain surplus in the market.
• Foreign prices remain unchanged and exports to small country fall.
• Thus the welfare effects on small country are insignificant and are assumed to be zero.f