Title: Tariffs and quotas | Economics Online | Economics Online
Headings: Quotas and tariffs
Quotas and tariffs
Quotas and tariffs
Quotas
Imposing a quota
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Tariffs
The impact of tariffs
Higher prices
Welfare loss
Distortion
Retaliation
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Tariffs
Tariffs, or customs duties, are taxes on imported products, usually in an ad valorem form, levied as a percentage increase on the price of the imported product. Tariffs are one of the oldest and most pervasive forms of protection and barrier to trade. The impact of tariffs
The imposition of tariffs leads to the following: Higher prices
Domestic consumers face higher prices, which also means that there is a loss of consumer surplus. However, there is a gain in domestic producer surplus as producers are protected from cheap imports, and receive a higher price than they would have without the tariff. However, it is likely that there is an overall net welfare loss. Without trade, the domestic price and quantity are P & Q.
If a country opens up to world supply, price falls to P1, and output increases from Q to Q2. As a result, domestic producers’ share falls to Q1 and imports now dominate, with the quantity imported Q1 to Q2. The imposition of a tariff shifts up the world supply curve to World Supply + Tariff.