If there is a net loss to society from tariffs, why do tariffs exist?

Short Answer

Expert verified
Tariffs exist despite a potential net loss to society because they serve multiple purposes, including protecting domestic industries, preserving jobs, raising government revenue, and as a negotiation tool in international trade. The decision to impose tariffs is based on a complex balance of socio-economic and political factors, not solely on economic efficiency or the welfare of consumers.

Step by step solution

01

Understand Tariffs

Tariffs are taxes imposed on imported goods and services by a government, increasing their cost and making them less competitive compared to domestic goods and services. This can lead to a net loss for society as consumers pay higher prices, and economic efficiency might be reduced.
02

Recognize the Negative Effects

The net loss to society from tariffs comes from two main sources: reduced consumer surplus (as consumers pay higher prices for goods) and reduced economic efficiency (as industries protected by tariffs may not use resources as efficiently as foreign competitors).
03

Identify Reasons for Existence

Despite these drawbacks, tariffs can serve several goals. These include protecting domestic industries from foreign competition (especially new or 'infant' industries), preserving jobs in certain sectors, and raising government revenue. They can also be used as a tool in trade negotiations.
04

Reflect on the Trade-offs

Societies and governments must weigh these potential benefits of tariffs against the costs, such as reduced economic efficiency and consumer surplus. The decision to impose tariffs often involves complex socio-economic and political factors, including the desire to support domestic industries and workers, as well as international trade and diplomatic considerations.

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Most popular questions from this chapter

Consider two groups of domestic producers: those which compete with imports and those which export goods. Suppose the domestic producers that compete with imports convince the legislature to impose a high tariff on imports-so high, in fact, that almost all imports are eliminated. Does this policy in any way adversely affect domestic producers that export goods? If so, how?

Suppose the landmass known to you as the United States of America had been composed, since the nation's founding, of separate countries instead of separate states. Would you expect the standard of living of the people who inhabit this landmass to be higher, lower, or equal to what it is today? Why?

The desire for profit can end up pushing countries toward producing goods in which they have a comparative advantage. Do you agree or disagree? Explain your answer.

Some economists have argued that, because domestic consumers gain more from free trade than domestic producers gain from (import) tariffs and quotas, consumers should buy out domestic producers and rid themselves of costly tariffs and quotas. For example, if consumers save $$\$ 400$$ million from free trade (through paying lower prices) and producers gain $$\$ 100$$ million from tariffs and quotas, consumers can pay producers something more than $$\$ 100$$ million but less than $$\$ 400$$ million and get producers to favor free trade too. Assuming that this scheme were feasible, what do you think of it?

Although a production possibilities frontier is usually drawn for a country, one could be drawn for the world. Picture the world's production possibilities frontier. Is the world positioned at a point on the PPF or below it? Give a reason for your answer.

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