Tariffs

By Aditi, Hasmitha, Pranav B, Pranavi

Tariffs
A tariff is a tax imposed by a government of a country or of a supranational union on imports or
exports of goods. An example of a tariff is ad valorem tax :
In the domestic market, the
equilibrium is at $1000 per board feet,
and the quantity demanded is at 40
million board feet. The world price is
significantly lower than the domestic
price. As the world price is lower,
americans will demand more lumber,
and the Quantity demanded increases
to 70 million. However, now domestic
producers will lose demand because
they cannot compete with cheap
prices from foeign markets. This
causes their production to decrease
to 10 million, which means that 60
million board of feet is imported from
foreign markets.
The government may impose a tariff
to increase the price of imported
lumber to support domestic
producers. Let's assume the
government implements a $400
tariff. This reduces the demand for
imported lumber as its price
increases by $400, and domestic
producers will have more demand.
Thus, the quantity demanded for
domestic producers increases to 30
million board of feet. This means that
imports have dropped from 60
million to only 20 million board feet.
Example
Tariffs can be categorized into two types. Unit Tariffs and Ad Valorem Tariffs. A unit
tariff is a tax that is levied as a fixed charge for each unit of a good that is imported.
For example, $200 per ton of imported steel. An ad valorem tariff is levied as a
proportion of the value of the imported good. For example a 25% tariff on imported
automobiles
Impact on Stakeholders
- After the imposition of tariff, domestic producers increase their
production and therefore their revenue also increases. This
can be viewed from the graph at area 1 which is the producer
surplus.
- Foreign producers supply the rest of the goods and services
and have to pay the tariff to the government. Thus, their
revenue decreases.
- The government receives a tariff revenue paid by these
foreign producers. Government revenue is area 3 and is
calculated by (Q3-Q2)*tariff.
- The importers must pay a higher price for the imported goods.
- The increase in price due to foregin producers paying the tariff
will result in higher prices for domestic consumers. This means
that the consumer surplus area of A1+A2+A3+A4 is lost.
- There is deadweight loss in the society as consumers have to
cut and pay higher prices. T2his is denoted by Area 2 + Area 4