Protectionist Tariffs

Summary

This video explores the concept of protectionist tariffs, focusing on their definition and economic effects using the example of South Korea's apple market. It explains how tariffs raise the price of imported goods, reducing consumer surplus and shifting the domestic supply-demand balance. While domestic producers and the government may benefit, foreign producers suffer due to decreased imports. The video concludes that while tariffs may provide short-term benefits to some, they generally lead to a net loss in total welfare for the economy, highlighting the inefficiencies and trade-offs involved.

Takeaways

• 😀 A protectionist tariff is a tax on imported goods meant to protect domestic industries from cheaper foreign competition.
• 😀 Tariffs can reduce the overall welfare of society, even though they may benefit some stakeholders.
• 😀 Domestic consumers are negatively impacted by a tariff, as it raises prices and reduces the quantity of goods demanded.
• 😀 Domestic producers may benefit from a tariff due to higher prices for their goods, which increases producer surplus.
• 😀 Foreign producers lose out because they receive the same world price minus the tariff, leading to reduced revenue from exports.
• 😀 The government collects tax revenue from tariffs, which can be used for public or merit goods, potentially improving overall welfare.
• 😀 The world supply curve shifts upward when a tariff is imposed, reflecting an increase in the price of imports.
• 😀 The imposition of a tariff in South Korea raises the price of apples, causing a decrease in imports and a shift in supply and demand.
• 😀 Total welfare in the market decreases due to the loss in consumer surplus and the creation of deadweight loss from the tariff.
• 😀 While producer surplus and government revenue increase due to the tariff, these gains do not compensate for the overall loss in total welfare.
• 😀 The tariff creates more losers (consumers and foreign producers) than winners (domestic producers and the government).

Q & A

What is a protectionist tariff?

A protectionist tariff is a tax on imported goods, meant to protect domestic producers from cheaper foreign competition.

What is the principle of comparative advantage?

Comparative advantage is the economic principle that countries can increase their total welfare by specializing in the production of goods they produce most efficiently and trading with other countries for goods they do not produce efficiently.

How does a protectionist tariff affect domestic consumers?

A protectionist tariff increases the price of imported goods, leading to a decrease in consumer surplus as the price paid by consumers rises and the quantity demanded falls.

How does a protectionist tariff affect domestic producers?

A protectionist tariff benefits domestic producers by increasing the price of imported goods, which encourages higher domestic production and increases producer surplus.

What happens to foreign producers when a protectionist tariff is imposed?

Foreign producers are negatively affected as the tariff reduces the quantity of goods they export. They continue receiving the world price (before the tariff), but they sell fewer goods, resulting in a reduction in their revenue.

What is the effect of a protectionist tariff on the quantity of imports?

The tariff reduces the quantity of imports because it raises the price of imported goods, leading to decreased demand from domestic consumers and increased production from domestic producers.

How is the effect of a tariff on the market represented graphically?

The effect of a tariff is shown by shifting the world supply curve upward, which reflects an increase in the price of imports. The price consumers pay increases, and the quantity demanded decreases, while the quantity supplied by domestic producers increases.

How does the government benefit from a protectionist tariff?

The government benefits from a protectionist tariff by collecting tax revenue, which is the difference between the world price and the new higher price, multiplied by the reduced quantity of imports.

What is the concept of total welfare in the context of a tariff?

Total welfare is the sum of consumer surplus, producer surplus, and government surplus. A tariff reduces total welfare if the losses in consumer surplus outweigh the gains in producer surplus and government revenue.

What is deadweight loss in the context of a tariff?

Deadweight loss refers to the reduction in total welfare caused by a tariff, represented by the two black triangles on the graph, which indicate a loss in societal welfare due to reduced consumer surplus and inefficiencies in the market.