Question

Give your response for the following two questions:

1. Under what conditions may a tariff actually make a country better off?

2. In addition to the production and consumption side deadweight losses, what are some of the other potential costs of tariffs?

Answer 1

Tariff can increase the welfare of a nation when the nation has a greater share in world export and import so that it is a relatively larger both in terms of volume of trade and share in world trade. When this happens, a tariff reduces the world price below its actual price so that there is an increased welfare in terms of greater tariff revenue and smaller production and consumption deadweight losses. Hence major requirement is that the country should be large.

There are many potential cost of tariff. It leads to rent seeking, incompetitive domestic sector, increased inefficiency primarily because there is a limited competition from foreign companies. There is a reduction in the variety of goods and services purchased by the nation. In the longer period of time it can be growth retarding because cost inefficiencies will multiply and affect other problems of production.