“While the imposition by a country’s government of an import tariff on a good cl
ID: 1220515 • Letter: #
Question
“While the imposition by a country’s government of an import tariff on a good clearly injures the country’s domestic consumers of the good, the tariff helps domestic import-competing producers and enhances overall country welfare (i.e., the “net welfare effect” is positive). Similarly, the granting of an export subsidy by the country’s government to home producers of a good also injures home consumers of the good, but the subsidy helps home producers and enhances overall country welfare.” Utilizing traditional supply/demand analysis, illustrate and explain the parts of the above statement that are TRUE (if any) and the parts that are FALSE (if any). (You can use a “small-country” case throughout your answer. Also, assume that there are barriers to the import of the good into the country granting the export subsidy.)Explanation / Answer
Statement 1:
The imposition of an import tariff on a good injures the country's domestic consumers of the good as it reduces consumer surplus because it increases the price of the good for the domestic consumer.
It increases producer surplus as it increases the price of the good.
But due to imposition of deadweight loss on the society which refers to consumption component as it reduces the amount of the quantity consumed and production component of the dead weight loss as it attracts producers to produce a good on which tariff has levied rather than producing the good in which the country has comparative advantage.
Thus, it reduced overall welfare of the society and reduces country's welfare.
Statement 2:
Export subsidy will raise the prices for domestic consumers . Thus, consumer surplus will decline.
Producer Surplus will increase.
But the protection cost of export subsidy is high. Thus, domestic producers gain less than the sum of the loss of domestic consumers and cost of subsidy to taxpayers.
Thus, it reduces overall country welfare due to reduction in total surplus.
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