Question

“A tariff on imports of a product hurts domestic consumers of this product more than it benefits domestic producers of the product.” Do you agree or disagree? Why?

What is the formula for the nationally optimal tariff? What is the optimal tariff if the foreign supply of our imports is infinitely elastic? Explain.

Answer 1

Yes, i agree that the tariff on import of a product more than it benefits domestic producer of the product.

Tariff are the taxes paid on goods imported.So, when tariff has to be paid, foreign suppliers raise the prices of the products to maintain their profits.Domestic producers on the other hand is already charging less price for the product which are also imported, increase the prices to meet the competition and to stay in the market which in turn hurt the domestic consumers who were getting the products in cheaper rates earlier have to pay more for the same. So, it can be said that it hurts domestic consumers more than it benefits them.

The nationally optimal tariff is the tariff which generates the largest gain to the country levying it. The formula for nationally optimal tariff is relative to the foreign supply elasticity of import, denoted as T* =1/Sm

where T* = optimal tariff

Sm = elasticity of import

Elasticity is defined as response of the variable to the change in another variable so lower the foreign supply of elasticity, higher be the optimal tariff.