International trade and investment lecture 8

Import tariff
The tariff will increase the price on the domestic market of the country that imposes tariff, i.e.
will increase the domestic price (i.e. the internal price).

Is the country that imposes the tariff small or large?
- Small country: no effect on the world market price.




Thus: the domestic price increases and the world market
price remains the same (no terms-of-trade effect).
- Large country: the world market price decreases.




Thus: the domestic price increases and the world market
price decreases (terms-of-trade gain for the country that imposes tariff). Who bears
the costs: domestic consumers and the foreign producers. Terms of trade improve.




The welfare effect of an import tariff for a large
country thus can be positive or negative depending on the level of the tariff and the price
elasticities of supply and demand.