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Home Field Trips Trade Tour The Imposition of Tariffs and Welfare Loss

Theories

The Imposition of Tariffs and Welfare Loss

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A tariff is an indirect taxes imposed upon imports. They can be either specific (fixed amount per good) or ad valorem (a % of the value). There are several reasons for the imposition of tariffs.

1. To reduce imports and protect domestic firms from foreign competition
2. To reduce imports in order to reduce balance of payments deficits
3. To raise government revenue

If the government of a country imposes a tariff on the imports from another country they raise the world price by the amount of the tariff they impose. The diagram below illustrates this.

As a result of the tariff the price at which domestic consumers can purchase the good from the rest of the world has increased from Pw to Pw'. The table below shows the levels of welfare before and after the introduction of the tariff.

Overall it would appear that consumers have seen a welfare loss, whereas domestic producers have benefited. A lot depends upon what the government does with the additional revenue and what the impact of the tariff is on the balance of payments situation. In LDCs tariffs are often used as a source of revenue however the welfare implications should be noted. This is especially important if tariff revenues are used simply to pay off foreign debt.

Next theory - Consumer and Producer Surplus >>

Related Glossary Items:
Balance of Payments
Protectionism
Tariff
Consumer Surplus
Producer Surplus

Related Issues:
The World Trade Organisation
Uruguay Round
Protectionist Policies of Zambia
Zambia's Exports and Imports
Zambia's Balance of Payments Situation

Related Theories:
The Imposition of Quotas
Consumer and Producer Surplus
Price Elasticity of Demand