Question

Policymakers in a small country impose a specific tariff of $2.00 per unit. Prior to the tariff the country imported 10,000 units and after the tariff 8,000 units. The redistributive effects of the tariff are:

Select one:

a. such that $16,000 is forward shifted onto domestic consumers.

b. impossible to determine with the information given.

c. shared equally between domestic producers and domestic consumers.

d. such that $4,000 is backward shifted onto domestic producers.

Answer 1

Answer: The correct option is a.

Redistribution effect is also known as transfer effect. In redistribution effect after imposing tariff the price level increase which increase the producer surplus and decrease the consumer surplus.

According to the given information tariff =$2 per unit; Total revenue before tariff = PQ where P is price and Q is quantity. Let original price =P.

Therefore, total revenue before tariff = P*10000 = 10000P.

After imposing tariff $2 the price raises and becomes: P+2

Now

Total revenue after tariff = (P+2)*8000 = 8000P+16000

This means extra $16000 amount bears consumers after imposing specific tariff.