Question

A tariff is a tax on imported goods. Suppose the U.S. government cuts the tariff on imported flat screen televisions. Using the four-step analysis found on pages 61-62 of Chapter 3, how do you think the tariff reduction will affect the equilibrium price and quantity of flatscreen TVs?

Answer 1

Ans) When world price is below domestic price, country imports goods. But this hurts domestic producers because it becomes hard for them to compete with cheaper imports. So, to protect domestic producers, government imposes tax. Tariff increases the price of imported goods and makes them less lucrative when compared to free trade.

If the government lowers the tariff, import will increase and equilibrium price will come down.

Without trade consumer surplus producer surplus

Without tariffs consumer surplus import producer surplus

With higher tariff Import QD

With lower tariff Twttt IMPORT

So, we see that with lowering of tariff, price has decreased and quantity purchased by consumers have increased. It has increased consumer surplus when compared to higher tariff.

However, it has lowered producer surplus.

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Or.

1) Below graph shows market with tariff.

With tariff Do 7

2) due to removal of tariff, supply curve will shift to the right.

3) That is, supply will increase.

4) Below graph shows the market without tariff, where price decreases and quantity increases.

1 Without tariff St 207 Ota