Question

1. Grease currently fetches a price of $300 per ton. To make one ton of grease, $80 worth of crude oil and $50 worth of emulsified soap is required. If it is assumed that $60 of domestic input is required to produce one ton of grease, what is the effective rate of protection (ERP) for domestically produced grease if the following tariffs exist:

   • 10% tariff on imported grease;
   • 6% tariff on imported crude oil; and
   • 5% tariff on imported emulsified soap.

Answer 1

Solution

Effective Rate of Protection (ERP)
Domestic Value added after tarrif - Domestic value added in free trade / Domestic valueof input in free trade
Free trade price of Grease	$300
10 % tarrif imposed	$30
30 / 60 = 50%
Crude Oil Free trade price	80
6 % tarrif imposed	4.8
4.8/60 = 8 %
Emulsified Soap Free trade price	$50
5 % tarrif imposed	$2.50
2.5 / 60 = 4.17%

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