Welfare Effects of a Tariff by Nurlyana Syazwani and Nur Najmi

Welfare Effects of a Tariff : Large vs Small Nations

by Nurlyana Syazwani and Nur Najmi

Generally speaking,

1) Whenever a "large" country implements a small tariff, it will raise national welfare.

2) If the tariff is set too high, national welfare will fall

3) There will be a positive optimal tariff that will maximize national welfare.

However, it is also important to note that everyone's welfare does not rise when there is an increase in national welfare. Instead there is a redistribution of income. Producers of the product and recipients of government spending will benefit, but consumers will lose. A national welfare increase, then, means that the sum of the gains exceeds the sum of the losses across all individuals in the economy. Economists generally argue that, in this case, compensation from winners to losers can potentially alleviate the redistribution problem.

And

1) Whenever a "small" country implements a tariff, national welfare falls.

2) The higher the tariff is set, the larger will be the loss in national welfare.

3) The tariff causes a redistribution of income. Producers and the recipients of government spending gain, while consumers lose.

4) Because the country is assumed "small," the tariff has no effect upon the price in the rest of the world, therefore there are no welfare changes for producers or consumers there. Even though imports are reduced, the related reduction in exports by the rest of the world is assumed to be too small to have a noticeable impact.