Question

The small nation of Country 4 institutes an export tariff on Good M, when the world price of Good M is greater than the domestic no-trade price of Good M. So Country 4 exporters have to pay a tariff (a tax) when they export Good M. (You don’t need a graph for this problem.)

(a) What happens to the domestic price of Good M in Country 4?

(b) What happens to domestic production of Good M in Country 4?

(c) What happens to domestic consumption of Good M in Country 4?

Answer 1

(a)

When small nation puts an export tariff on a good then in that case price of good in that nation reduces by the amount of export tariff.

So, if Country 4 imposes an export tariff on Good M then the domestic price of Good M will decrease in Country 4.

(b)

Éxport tariff has resulted in a decrease in price of Good M in Country 4.

This decrease in price will lead to decrease in domestic production of Good M in Country 4.

(c)

Éxport tariff has resulted in a decrease in price of Good M in Country 4.

This decrease in price will lead to increase in domestic consumption of Good M in Country 4.