13.10 : Tariffs

A tariff is a tax imposed on imported goods. It is designed to increase the cost of imported goods, giving domestic producers a competitive edge.

For instance, if the government introduces a tariff on imported coffee beans, it raises the price consumers must pay for imported coffee. This benefits domestic producers by allowing them to sell their coffee beans at a higher price due to less competition from cheaper international suppliers. The new equilibrium price, which includes the tariff, is higher than the previous world price, reducing the total quantity of coffee beans consumed in the domestic market.

The tariff negatively impacts consumers, reducing their consumer surplus. Previously, consumer surplus was the area between the demand curve and the world price line. With the tariff, the domestic price of coffee increases, shrinking consumer surplus, as consumers must now either pay the higher domestic price or reduce their coffee consumption.

On the other hand, domestic producers benefit from the tariff. The higher domestic market price allows them to expand production and capture more market share. The producer surplus increases, represented by the area between the supply curve and the new price line. This gain for domestic producers comes at the expense of both consumers and foreign suppliers.

In addition to benefiting domestic producers, the tariff generates revenue for the government. This revenue equals the tariff rate multiplied by the quantity of imports after the tariff. However, the tariff also creates deadweight loss, representing a reduction in overall economic welfare. These deadweight loss areas arise from inefficient production—where domestic producers replace more efficient foreign producers—and from reduced domestic consumption, as some consumers forgo purchases due to higher prices.

Thus, while tariffs protect local industries and generate government revenue, they also lead to higher consumer prices, reduced trade, and create a loss of market efficiency.