hw7_solutions - Econ 4550/6550 International Trade...

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1 Econ 4550/6550 International Trade Assignment 7/Solutions 1. What is an “optimum” tariff? Under what conditions can a country use a tariff to improve its welfare? Explain clearly the mechanism through which the imposition of a tariff can improve national welfare. Does a positive optimum tariff always exist? Why or why not? [5] Answer: An optimum tariff is a rate of tax on imports t hat maximizes a country’s level of welfare. A positive optimum tariff may exist if a country is a big player in world markets, i.e., if its production and consumption patterns can influence world prices. Secondly, for a tariff rate to be optimum, there must not be any retaliation from other countries. The net welfare gains from the imposition of a tariff depend on whether the terms of trade (TOT) gains (emerging from the ability of the country to raise domestic prices and lower world prices) more than offset the consumption and production distortion losses. If that happens, the country can keep increasing the tariff rate till this difference (between TOT gain and distortion losses) is maximized. An optimum tariff may not exist under the following three scenarios: (i) the country is a small open economy, lacking the ability to influence world prices, (ii) the tariff rate is prohibitive, i.e., it drives imports to zero, and
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This note was uploaded on 10/26/2011 for the course ECONOMICS 360 taught by Professor Nicholassly during the Spring '11 term at University of Oregon.

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hw7_solutions - Econ 4550/6550 International Trade...

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