Question

1. Assume a domestic market imposes a tariff on foreign goods. How will this affect the domestic price? If the foreign market has highly inelastic supply and the domestic market is highly elastic demand, which nation will pay the bulk of the tax? (10 points)

Answer 1

If a domestic market will impose a tariff on a foreign good it will lead to an increase in the domestic price, since a part of the price will now be given to the government in the form of tariff.

If the foreign market has a highly inelastic supply it means that the nation does not respond to a change in price, whereas a highly elastic demand in the domestic market means that the consumers in the domestic market respond to a change in price and might consume lesser of the good if the price is increased. In such a scenario the foreign national will have to pay the bulk of the tax.