Question

Given the effect on total surplus of imposing tariffs when a country is a "small country," what two reasons suggest why tariffs exist?

Explain how the nature of benefits and costs associated with tariff legislation leads to the successful passage of tariff legislation.

Answer 1

A tarrif decreases the net welfare of small open economy. In spite of knowing the welfare effects of tariff, some small open economy is still argue in favour of tariff. Sometimes they are lobbying activities done by the local producers in order to restrict the inflow of foreign goods and services. Much of their market power depends on foreign competition and they attempt to block foreign imports by lobbying the government. The government may also be willing to restrict imports because it may feel that it's domestic industries are not capable enough to compete with more competitive foreign companies.

government also gets its share of revenue from imposing such tariffs which then becomes another reason for why tariffs exist.

The benefits of tariff are obviously directed towards consumers who are now able to get foreign goods and services at a lower cost and with a variety. The cost is however borne by the domestic producers who are more aligned and united then the group of consumers. because on one side there is a scattered group of consumers receiving the benefits of tariff and on the other side there is a consolidated and United group of producers who are losing out due to tariff, the group of producers are able to lobby the government in their favour and that is how the successful passage of tariff legislation works.