Using an appropriate diagram, explain who gains and who loses from the introduction of a tariff.
1. Demands of the question: A diagram of the tariff is required. This question wants the student to evaluate the effect the introduction of a tariff has on stakeholders. Identification of the people who gain and lose. It includes domestic producers, international producers, the government, and domestic consumers. This question will take 20 minutes because it is Paper 2.
2. Definitions:
Tariff: Tariffs are taxes on goods imported into a country. They are a form of protectionism and are often used by governments to try to reduce the level of imports into a country.
3. Triple A Textbook:
Tariffs
A tariff is a tax on imports, which can either be specific (so much per unit of sale) or ad valorem (a percentage of the price of the product). Tariffs reduce supply and raise the price of imports. This gives domestic equivalents a comparative advantage. As such, tariffs are distorting the market forces and may prevent consumers from gaining the benefit of all the advantages of international specialisation and trade. The impact of a tariff is shown in Figure 1 below.
Figure 1 Impact of a tariff
The tariff has the effect of shifting the world supply curve vertically upwards by the amount of the tariff. The level of imports will fall from QaQd to QbQc. The government will also raise revenue, shown by the blue shaded area. The level of domestic production will increase from 0Qa to 0Qb.
4. Powerpoint Slides
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5. Diagrams
6. Evaluation Suggestions
Since this question is, in essence, an evaluation question, I would examine the stakeholders of the situation in order to evaluate the introduction of a tariff. The relevant stakeholders are mentioned in step 1: domestic producers, international producers, the government, and domestic consumers.
