Question

Problem II. You are a policy maker. Name and describe situation(s) where it is beneficial to do the followings. Briefly support your choice using economic arguments. A possible answer can be never! (15 points, 3 points each) 1. Utilizing general equilibrium analysis to study the impact of protection. 2. Measuring tariff rates using effective rate of protection. 3. Using trade taxes as a source of government revenue. 4. Imposing import tariffs to extract a foreign monopoly profit. 5. Imposing import tariffs to offset a foreign production subsidy.

Answer 1

1.

A general equilibrium analysis is used because the partial analysis assumes the effect of tariff only on one market without analysing the effects on the other countries. Hence, we use the general analysis where all variables are subject to change.

2.

It is essential to measure tariff rates using the effective rate of protection when certain imports threaten the domestic producers of the commodity away from the business. The rate of effective protection takes into account the tariff on the raw materials that are imported from the

3.

Trade taxes can be used as a major source of government revenue when the ctitzens of the country are importing a lot of commodities from other countries. This will not only increase the revenue of the government, imposing tariffs will also protect the domestic producers.

4.

This is possible when there is one monopoly foreign producer for a commodity that is domestically demanded and has no domestic producers. The government can impose tariff on the commodity, and that can gain the government some revnue, while increasing the cost for the foreign producer to transport the goods, which also raises the price of the goods but not equivalent to the tariff.

5.

This is used when the exporting country subsidises the exports. This reduces the cost for the exporting countries, and hence the price of their export, which threatens the domestic producers. Hence to offset this and to protect the domestic producers, the importing country government can impose duties on the imports.