Question

Covid-19 has worked like tariff that restricts trade. The idea then is to understand effects of tariffs on intermediate goods. If tariffs are imposed on intermediate goods, effective tariffs could be a magnified version of nominal tariffs. This obviously has important welfare implications for the world. Explain the impact on welfare.

Answer 1

When the tariff increases, then it increases the price of goods and services sold to the consumers in in the world. It leads to decrease in quantity demanded. As a result, total welfare decreases. It means that consumer surplus as well as producer surplus will decrease and deadweight loss will be created. The price will increase, due to loss of resources, is going to increase the cost of production. Supply of intermediate goods, will also decreasing, adding to the rise in price of the final goods and services. It will make negative impact upon the welfare of people, producers and society as a whole.