CHAPTER 4
TARIFFS
CHAPTER OVERVIEW
This chapter discusses the operation and effects of tariffs. The chapter first defines import tariff, export tariff, specific
tariff, ad valorem tariff, and compound tariff. Next discussed is the effective rate of tariff protection and the process
of tariff escalation. Attention then turns to postponing import duties via bonded warehouses and foreign trade zones.
The chapter examines the welfare effects of an import tariff for a small importing country and a large importing
county. It is noted that if a nation is small compared to the world its overall welfare necessarily falls if it levies a
tariff on imports. If the importing nation is large relative to the world, the imposition of an import tariff may improve
its welfare.
The chapter then examines the merits of trade restrictions. Among the arguments for trade barriers are job creation,
protection against cheap foreign labor, fairness in trade, maintenance of the domestic standard of living, equalization
of production costs, infant-industry argument, and various noneconomic arguments. The chapter concludes by
examining the political economy of protectionism.
After completing this chapter, the student should be able to:
• Define specific tariff, ad valorem tariff, and compound tariff.
BRIEF ANSWERS TO STUDY QUESTIONS
1. A specific tariff is expressed as a fixed amount of money per unit of the imported product. An ad valorem
3. When material inputs or intermediate products enter a country at a low duty while the final imported product
4. Developing countries have argued that industrial countries allow raw materials to be imported at low nominal
tariff rates while maintaining high nominal tariff rates on finished products.
5. Consumer surplus (producer surplus) refers to the difference between the amount actually paid by the buyer
6. A tariff detracts from the nation’s welfare via its consumption effect and protective effect.
7. In general, the size of the welfare responses to tariffs is determined by the impact of the tariffs on domestic
prices and the response of domestic producers and consumers to these price changes.
8. Given a large-country model, a country which imposes a tariff on imports finds its terms of trade improving.
9. Economists generally contend that most arguments for trade restrictions cannot withstand searching analysis.
11. Terms of trade improve, while trade volume declines.
13. Our trade model predicts that by forcing up the price of oil in the United States, domestic production would
be encouraged, while domestic consumption would be discouraged.
14. A bonded warehouse is a storage facility for imported goods; it allows imported goods to be put into storage
15. a. P = $250; Q = 25. Consumer surplus = $3125; producer surplus = $3125.
16. a. $400, 12 tons, 2 tons, 10 tons.
b-1. SUS+F shifts upward by the amount of the tariff, $250.
b-2. $600, 10 tons, 4 tons, 6 tons.
b-4. $350, improve, increase, $300.
