Question

Evaluate the validity of this statement;

The small open economy model of a competitive market suggests that the only source of deadweight loss from a tariff is from preventing mutually beneficial trades.

Answer 1

When due to tarrifs , price in competitive market rises which leads to increase in domestic production and decrease in domestic consumption when it compared to the situation of Benificial trades. As you know that excise tax results in loss in efficiency which is known as Deadweight loss . The reason is that tax prevents mutually beneficial trade from occuring.