Tariffs under Perfect Competition 1. ‘Even though the optimal tariff for a small

Question

Tariffs under Perfect Competition

1. ‘Even though the optimal tariff for a small country is zero we find that political considerations result in positive tariffs in small countries and the main reason for this is the underlying incentives behind political lobbying” Explain this statement

2. Consider a large country applying a tariff, t on imports. How does the size of the terms-of-trade gain compare with the size of the deadweight loss when (i) the tariff is very small, and (ii) the tariff is very large? Use graphs to illustrate your answer.

Explanation / Answer

1) Political lobbying refers to endeavours by political parties to influence individuals or groups in order to get their support for their political aspirations . Every democracy faces such lobbying . Imposing tariffs helps domestic producers to compete in world market . Tariff is a tax levied on goods imported from foreign countries . Imposing tariffs raises the price of import goods in domestic market . This reduces demand for imported goods . Hence domestic producers are benefitted because they can sell their product at either higher price or charge lower price and get a larger market share . So to get the confidence and favour of domestic producers , political parties sort to such kind of lobbying by imposing positive tariff rates .

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