Question

Explain the impact of a tariff in a small country on the domestic price, domestic producers, consumers, and the government. Is the overall impact on the economy positive or negative? What do we call these losses or gains?

Answer 1

If there is a tariff imposed on the goods imported in a small nation then the price of the goods will increase, this will negatively affect the domestic consumer and consumer surplus will decrease, this will also increase the producer surplus in the market, increase the government revenue and deadweight loss in the economy, the loss in the consumer surplus cannot be fully covered by increase in the other surpluses hence the economy will be negatively affected overall. producer will gain, government gain and consumer loss.