Question

Explain the concepts of dead weight loss do to a tariff.

Answer 1

when a tariff is imposed, the price of the product in the country rises. This is true for domestic producers as well as consumers. As a result, there is rise in producer surplus but fall in consumer surplus. Moreover, the government also makes tariff revenue. However, the gain in producer surplus and the tariff revenue is less than the loss in consumer surplus. Hence, there is decline in social welfare due to the tariff. This is the deadweight loss due to a tariff.