Question

Economist Abba Lerner once proposed a tariff on oil imports equal to 100 percent of the import price. this tariff is designed to reduce dependents on foreign sources as well as to discourage OPEC from raising prices ( since, due to the tariff, the delivered price would rise twice as much as the OPEC increase, causing a large subsequent reduction in consumption). should this proposal become public policy? why or why not?

Answer 1

Economist Abba Lerner once proposed a tariff on oil imports equal to 100 percent of the import price. this tariff is designed to reduce dependents on foreign sources as well as to discourage OPEC from raising prices ( since, due to the tariff, the delivered price would rise twice as much as the OPEC increase, causing a large subsequent reduction in consumption).

Whether this proposal should become public policy or not depends on the type of economy for which the policy is being considered. If a country have a potential to produce oil of its own than the proposal should become a public policy, because this will increase the price of the imported oil and hence encourage the local firms in the oil market to increase their production. If their production increases it will make the country self sufficient in oil and also will help in the development of the country by increasing the GDP or National income. Increase in price of oil will make the local firms more competitive and hence they can survive in the foreign market.

But if a Country don't have the potential to produce its own oil, than this proposal shouldn't become a public policy as it can be dangerous to the country. This is because if the country imposes a 100% tariff on the import of oil than the price of imported oil will double and hence the people will have to pay double price for the oil than what they used to pay before. But this increase in price will not decrease the import and hence consumption of oil because it is very important for the economy to run and since there are no substitutes of oil so the PRI e elasticity of demand for oil is comparatively inelastic . So increase in price of the oil will result to an increase in the overall prices of all the goods and services (increase in the inflation rate) and hence it will act as a barrier to the growth and development of the country.