Question

In which way do tariffs not introduce dead weight loss into the market?

It allows for less efficient firms to produce

They decrease the number of consumers

The price of the good goes up

Tariff revenues are given to the government

Answer 1

It allows less efficient firms to produce

There are several ways tariffs can create deadweight loss, the first being reduced purchases of desired goods. Suppose that imported widgets cost $100 each, and then the government puts a 10% tariff on them, so consumers pay $110 each. This costs each of N consumers $10, and provides $10N in government revenue. However, people who value widgets at $101 through $109 cannot or will not buy them at $110, so these consumers do without widgets, and the government does not get any tariff revenue from their non-purchases. That’s a deadweight loss.

There are other ways in which tariffs can create losses. If the United States of America is the government in question, and widgets are not purely a consumption good, but used in assembling or producing other goods, then American businesses which use widgets to make vreeblefitzers are now at a disadvantage, and less able to compete in American or foreign markets. They may have to lay off employees, or even close down altogether, which means losses for American businessmen and employees, and losses for the government when American vreeblefitzer manufacturers pay less in taxes, and their former employees pay less in income and payroll taxes, and collect unemployment compensation and other benefits before finally getting lower-paid jobs doing something else. The new jobs are likely to be lower paid, because if the workers could easily find higher paid jobs, they would presumably have been working at those already

Examples of Deadweight Loss
Minimum wage and living wage laws can create a deadweight loss by causing employers to overpay for employees and preventing low-skilled workers from securing jobs. Price ceilings and rent controls can also create deadweight loss by discouraging production and decreasing the supply of goods, services, or housing below what consumers truly demand. Consumers experience shortages, and producers earn less than they would otherwise.

Taxes also create a deadweight loss because they prevent people from engaging in purchases they would otherwise make because the final price of the product is above the equilibrium market price. If taxes on an item rise, the burden is often split between the producer and the consumer, leading to the producer receiving less profit from the item and the customer paying a higher price. This results in lower consumption of the item than previously, which reduces the overall benefits the consumer market could have received while simultaneously reducing the benefit the company may see in regard to profits.