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CHAPTER 8 ANALYSIS OF A TARIFF Objectives of the Chapter This chapter analyzes the advantages and disadvantages of tariffs. Except for some recognized exceptional cases, there is a rare consensus among economists that freer trade is better than protectionism. As illustrated in this chapter, economic analysis has consistently demonstrated that there are usually net gains from freer trade for the nation as well as for the world. A tariff helps import-substituting producers, and the government collects some tariff revenue (import taxes); however, consumers of the good are unambiguously harmed. Whether or not a tariff will result in a net gain for the importing country will depend on the size of that country. If the country levying the tariff is small (meaning that its actions cannot affect the world price of the good on which the tariff is levied), then the loss to consumers is larger than the sum of gains to producers and to the government. On the other hand, if the country is large (meaning that, by limiting imports, it can force down the world price of the good), then levying a tariff may result in a net gain for the country. This will depend upon the portion of the government’s revenues that are, in essence, extracted from foreign producers versus the size of the country’s deadweight losses from the tariff. In any case, the world as a whole always loses from the imposition of a tariff. After studying Chapter 8 you should be able to identify 1. the advantages and disadvantages of a tariff. 2. how a tariff lowers the welfare of the world as a whole. 3. ad valorem tariffs versus specific tariffs. 4. the effective rate of protection. 5. how demand-supply analysis can be used to assess the gains and losses of a tariff, using both graphical and tabular expositions. Important Concepts Ad valorem tariff: A tariff that is set as a percentage of a value of a good when it reaches the importing country. Consumption effect: The welfare loss to consumers in the importing nation that corresponds to their being forced to cut their total purchases of a good as a result of the tariff. Deadweight loss: Consumer loss from a tariff that accrues to neither the government nor producers. Effective rate of protection:
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This note was uploaded on 02/18/2010 for the course ECON 343 taught by Professor Dblack during the Fall '09 term at University of Delaware.

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