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Economics explained
Category:
International trade
Tariffs
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A tariff is a tax on imports.
Tariffs increase the costs of production to importers, thus raising the price of foreign goods in the domestic market and lowering the amount of products imported
The imposition of a tariff will benefit domestic producers as their output rises from Q to Q1. Domestic consumers lose out as they have to pay a higher price P1 and experience a reduction in their consumption from Q3 to Q4.
Elasticity of demand for imports
A tariff will be more effective in raising revenue if demand for imports is price inelastic whereas it will be more effective in protecting the domestic industry if demand for imports is price elastic.
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