that is, tariffs are beneficial to the society

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that is, tariffs are beneficial to the society

Post by jancancook on Sun Nov 06, 2011 7:28 pm

that is, tariffs are beneficial to the society if the area given by the rectangle E more than offsets the losses shown by triangles B and D. Rectangle E is called the terms of trade gain whereas the two triangles B and D are also called efficiency loss, as this cost is incurred because tariffs reduce the incentives for the society to consume and produce.
The model above is only completely accurate in the extreme case where none of the consumers belong to the producers group and the cost of the product is a fraction of their wages. If instead, we take the opposite extreme, and assume all consumers come from the producers' group, and also assume their only purchasing power comes from the wages earned in production and the product costs their whole wage, then the graph looks radically different. Without tariffs, only those producers/consumers able to produce the product at the world price will have the money to purchase it at that price.


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