Question

Welfare effect of a tariff in a small country

Answer 1

Welfare effect of tariff in a small country can be explained from the point of view of four parties that get impacted by imposition of tariff i.e

1) Consumers : A tariff imposed on imports of a particular product essentially makes all consumers worse off since they get the same value preposition from goods by paying a higher price. Also, the price competition in domestic market is reduced which results in higher prices of all domestic substitutes of the imported good.

2) Producers : An import tariff makes producers in an economy better of as they can now charge a higher price for the goods produced by them in a legal manner, and thereby increase their output, employment and profits eventually. Tariff also helps producers to test the market in a scenario of flexible pricing schedule.

3) Government : The government of importing country is on the receiving side of tariff and hence, is better off as it has generated a revenue stream for welfare activities in the economy.

4) Aggregate impact : The net effect of imposing tariff in a small importing country is always negative as it only leads to advancing surplus to government and producers at the cost of consumer's wealth. The final consumer becomes the primary troubleseeker of the tariff taking all the impact of increased prices due to tariff.