Question

Discuss the market outcome of a tariff. How does it affect the market participants? Which participant gain and which participant lose

Answer 1

Ans) When countries import goods, consumers are benefitted as they get to pay less than the domestic price i.e their consumer surplus increase. But imports hurt domestic traders as they have to lower the prices to sell their product. To help these domestic traders, government imposes tariff i.e a tax on imported items.

Tariff increases the price of imported goods. As a result, now domestic traders can raise their price than before i.e producer surplus increases. But consumer surplus decreases as they have to, now, pay more than they were paying under free trade.

So when tariff is imposed, domestic traders are benefitted and domestic consumers are at loss.