Tariffs always cause a net welfare loss

Tariffs always cause a net welfare loss

Length: 1225 words (3.5 double-spaced pages)

Rating: Excellent

Open Document

Essay Preview

More ↓
Tariffs always cause a net welfare loss

Explain and critically evaluate this statement.

In this essay, I will be discussing the impact of protectionism, in
focus, the impact of tariffs, import duties. As well discussing the
overall effect on welfare from the tariff, the gainers and the losers
will need to be identified. I will illustrate this diagrammatically. I
will then move to discuss the value of the optimal tariff imposition.
As well as discussing the first best argument, I will also look at the
value of second best arguments, examining whether or not tariffs do
always cause a net welfare loss.

A tariff requires the importer to pay a given fraction of the world
price to the government. This protects domestic producers by raising
the world price well above the domestic price; this of course has a
downside for the consumers. A tariff works like a tax from the
consumer's perspective: there are transfers from the consumers to both
the government in the form of revenue and to the producers in the form
of higher profits. This can be illustrated effectively by looking at
Figure A, it shows the demand and supply curves for the home economy,
Pa is the point where there is no trade, where supply meets demand. Pw
is the world price for the commodity, the point of free trade and Pw +
t is the price plus the tariff. We can see that during free trade, at
Pw the home economy should import (Qf - Cf) but when a tariff is
implemented this means they will import (Qt - Ct). As we can see from
Figure A, the government will gain the revenue from the tariff, area
B. The price rise in imports means that there is a reduced demand for
them and increased demand for domestic producers. This results in a
gain for the producer, area E. The loss for the consumer, area C, this
is where consumption is cut when Cf moves to Ct. Area A, is also a
loss area, as when production increases from Qf to Qt production is
inefficient, over the world price so this area is the extra cost that
the economy pay for producing the good at home. We can summarize these
gains and losses we can see that there is indeed a net loss for
welfare: B - (E+A+B+C) + E = - (A-C).

So are there any valid 'justifications' for the imposition of tariffs.
The strongest argument (some would say the only) in favour of a tariff
comes with the recognition that a domestic economy imports such a
significant supply of the world market for a commodity that an

How to Cite this Page

MLA Citation:
"Tariffs always cause a net welfare loss." 123HelpMe.com. 24 Mar 2019
    <https://www.123helpme.com/view.asp?id=98373>.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Cause and Effect of Illegal Immigration Essay example

- Illegal immigration still remains as one of the major problems on the U.S-Mexico border in our country. The effect of having illegal immigrants in our country puts the U.S in a dire situation. Many people are even starting to question the authority of the U.S. Customs and U.S. Border Patrol agents. Even though Homeland Security is always consistently hiring for U.S customs and border patrol agents to watch over the southern border to make sure no illegal immigrants sneak into the U.S. Many people are blaming illegal immigration for the loss of “American” jobs and why many Americans cannot find work today in the U.S....   [tags: Immigration ]

Research Papers
1358 words (3.9 pages)

A "Net" Loss Essay

- Net Loss Many people believe that shark nets protect swimmers by blocking sharks from entering the swimming area. However, these nets are not designed to act as a barricade, but as fishing net to catch and kill the sharks, among other species. Shark nets should not be used for protecting swimmers from shark attacks. They protect swimmers, not by deterring or blocking sharks from entering the area, but by killing them and reducing the area’s shark population. Therefore, there are fewer attacks on humans, but at a high cost to the already struggling shark population....   [tags: Wildlife Conservation]

Research Papers
842 words (2.4 pages)

Essay about Effect Of The Net National Welfare

- There are three parts that the net effects consist of for large importing countries: first is a positive terms of trade effect, then a negative production distortion, and finally a negative consumption distortion, and there are also positive and negative effect that the net national welfare can have. If it is a positive effect the tariff invoked by a large importing country may and can raise national welfare. In other words, when a large country invokes a small tariff, it raises national welfare, a high tariff, means the fall of national welfare, and to maximize national welfare, there has to be a positive optimal tariff....   [tags: World Trade Organization, International trade]

Research Papers
1020 words (2.9 pages)

Essay on The State of Welfare

- The welfare system in the United States performs a wide variety of functions to assist people who have fallen onto hard times. Welfare programs are an evolution of the British Poor Laws whose roots lie in basic charity and the human ideology that one should aid those less fortunate. Today’s welfare system , being controlled by the state and federal governments are by no means perfect, but they do provide a more stable form of assistance so that the people of the United States know that if they fall into dire times, there is a safety net....   [tags: Welfare]

Research Papers
919 words (2.6 pages)

Welfare Programs Cause Crime Essay

- "Controlling violent crime is largely a state and local responsibility," declare Robert Moffit, Edwin Meese, and Patrick Fagan of the Heritage Foundation. "State and local officials," they say, "should take the initiative to identify and target the hard-core criminals who are committing the majority of crimes and implement tough policies to put them behind bars and keep them there. Mounting evidence shows that this approach works." Attacking the root causes of crime also makes sense, provided those causes are correctly identified....   [tags: Expository Cause Effect Essays]

Research Papers
488 words (1.4 pages)

Myth of the Lost Cause: Why the Confederate Loss Was Not Inevitable Essay

- For over a century, many writers and historians theorized that the Confederate loss during the Civil War was, in fact, inevitable, and that they were only fighting a losing war against an overwhelming invading force. This idea shows the southern gentleman, in his honor, taking up arms against what was obviously a superior foe in order to preserve their state’s rights, their families, and their homes, with no hope of coming out the victor in the contest. This is a romantic notion of a time forgotten where gentlemen fought a barbaric would-be conquering force in order that their economic tyranny be forced upon the southern gentleman....   [tags: civil war, lost cause, edward pollard]

Research Papers
979 words (2.8 pages)

Animals Should Not Be Granted Human Rights Essay

- Mason Walter Instructor Gregg Fields English 101 27 July 2015 Animals Should Not Be Granted Human Rights Then God said, “Let us make man in our image, after our likeness. And let them have dominion over the fish of the sea and over the birds of the heavens and over the livestock and over all the earth and over every creeping thing that creeps on the earth.” Genesis 1:26 In today’s society there are many topics of discussion that are widely argued by many different kinds of people. These arguments and discussions really shape the minds of people on topics of discussion and show people different sides of arguments....   [tags: Animal rights, Animal welfare, Abuse, Human]

Research Papers
1476 words (4.2 pages)

The True Birth Of Our Welfare System Essay

- 110,489,000. 110,489,000, is the total amount of Americans who are on the nation’s welfare system as of the year 2015 (U.S. Department of Commerce). Welfare, is the social effort designed to promote the basic physical and material well-being of people in need by the government, for its’ people. The true birth of our welfare system began during the Great Depression era where, one quarter of the nations labor force was unemployed (wellfareinfo.org), resulting in American families to be impelled into the depths of poverty....   [tags: Welfare, Unemployment, Welfare fraud]

Research Papers
1550 words (4.4 pages)

Essay on Welfare Programs Should Be Paid

- In 2015, around 500 billion dollars of American citizen’s tax money was spent on numerous welfare programs. As of today, the U.S. Government is 19.3 trillion dollars in debt. Logically, it does not make sense for the government to have trillions of dollars in debt, yet continue to use 500 billion dollars per year towards a program that isn’t guaranteed success. Welfare programs potentially hurt its recipients. Benefits from welfare programs should be more difficult to receive because recipients can use their money for drugs, may not even be looking for employment, or even cheat the system (Welfare Assistance)....   [tags: Welfare, Welfare fraud, Unemployment]

Research Papers
1058 words (3 pages)

net bans Essay

- In July of 1995, Florida put into effect a new law banning the use of gill nets in all inshore water of Florida. The law contained two significant provisions: 1) some non-gill nets would be allowed, but maximum size would now be limited to 500 square feet; and 2) unemployment compensation would be available to affected netters through a 20 million dollar fund set aside to purchase the nets that would be made obsolete(Stearns, par.5). This ban on nets has led to a dramatic comeback for a variety of fish species, including the Spanish mackerel and Florida mullet....   [tags: essays research papers]

Free Essays
1885 words (5.4 pages)

increase in imports will affect the world price. If this was the case
then the cost of the last unit imported may exceed the benefit, as all
consumers must pay the higher world price. The economy as a whole
could gain by imposition of an optimal tariff, which restricts imports
to the point where the marginal benefit of importing was equal to the
marginal cost. This could be seen as a gain in welfare, which could be
seen as offsetting other welfare losses. In Figure 2b, at point b,
this is where demand is for imports once the tariff is in place, Ct -
Qt; this tariff results in reducing the home demand below the quantity
demanded at the world price. So the demand for imports, the gap
between home demand and home supply at the world price, will fall,
from Cf - Qf to Ct - Qt. Now the supply of imports exceeds demand at
the old world price; therefore the world price must fall to reduce the
quantity of imports supplied. So, by reducing the price of world
imports, the tariff has improved the terms of trade of the country,
area F. This is the first-best argument in favour of a tariff as
policy targeting states that the most efficient way to attain a given
objective is to use a policy that has a direct influence on that
activity.

We can now see how the optimal tariff can in fact provide a gain in
welfare but we have not considered the effect of this tariff on other
countries. One country could gain from the imposition of this kind of
tariff, but very likely at the expense of others. Retaliation by other
countries in this situation would more than likely end with everyone
being worse off. But, what if all where to impose them, would they all
benefit? We are now starting to see how this could be seen as another
instance of Prisoners' Dilemma game and if this is the case then there
is not always a net welfare loss. This is why the General Agreement on
Tariffs and Trade (GATT) is very important as this co-ordinates the
behaviour of countries internationally so to avoid mutually damaging
trading behaviour.

Policies, which operate indirectly through other activities, are known
as second best because of the distortions they introduce. Most of the
other arguments in favour for tariffs fall into this category. We must
consider the value of them while considering the welfare effects.
Firstly, lets consider the argument of infant industries. The argument
is that in the long run the industry will be profitable but will need
some initial help to get started, like an import tax. But, does a
venture of this kind require help because it cannot secure bank
backing. So, what would happen then if the banks judgement on the
long-run viability on the venture was right and the infant never grows
up? I feel that this is not a valid justification for the imposition
of a tariff and would agree that if a tariff were imposed in these
circumstances there would be a net welfare loss. Other arguments for
tariffs are also mainly groundless.

Although there may be a small case for protecting domestic industries
against temporary 'dumping', of foreign produce, but perhaps another
method of protectionism could be used here such as export subsidies to
reduce the welfare loss. Complaints from Governments about cheap
foreign labour cannot be sustained either on the light of comparative
advantage.

As I have discussed, there is a strong case that tariffs always cause
a net loss. The optimal tariff may look to be producing welfare gains
for one country but as I discussed this will have effects for other
countries. Although there is a net welfare gain for one country there
will be loss for others. Therefore tariffs do always cause a net
welfare loss. Also as I discussed, this can also be seen as another
instance of the prisoners' dilemma game. I also briefly discussed the
value of second-best arguments to find that these are arguments do not
provide a sufficient welfare gain to offset other welfare losses
incurred. So, if the case is so strong why do tariffs exist, perhaps
the answer is partly political, perhaps politically its more tactful
to collect tariff revenues and allow consumers to suffer high prices
rather than taxation to subsidise production. But perhaps it's purely
because the costs of tariffs are diffuse and the benefits are
concentrated.

Bibliography

Mackintosh, M., Brown, V., Costello, N., Thompson, G., Trigg, A.,
Dawson, G., (2000) D216 Economics and Changing Economies, Chapters
9-15. Glasgow, The Bath Press/The Open University.

Trigg, A., Atkinson, B., Dawson, G., Mackintosh, M., D216 Economics
and Changing Economies, Workbook. Kent, Thanet Press Ltd.
Return to 123HelpMe.com