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A small country both produces and imports bread, the world price of which is $1 per...

A small country both produces and imports bread, the world price of which is $1 per loaf. Production of the bread causes a pleasant smell, which the producers of bread are unable to charge for, and which the people in the country enjoy. In fact, it has been ascertained that the value of this smell to society is $0.50 per loaf.  

Would a tariff of $0.50 per loaf necessarily be beneficial? Why or why not? Explain.

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Answer : Government impose tariff on production if it create negative externality on the society. Here the production of bread gives a pleasant smell to the society and the society enjoy this smell. So, bread production creates positive externality on the society. Now if government impose tariff of $0.50 per loaf on production, then it will increase the production cost. Hence producers will decrease their production level. As a result, people will get less that pleasant smell to enjoy. So, here imposing tariff on bread production by $0.50 per loaf is not beneficial.

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