Tariffs (SL IB Economics)

• Free trade aims to maximise global output through national specialisation
• However, there are numerous reasons why countries would seek to limit free trade in order to protect themselves from certain outcomes
• This is called protectionism and may take the form of import tariffs, export subsidies, the use of quotas or embargoes

• The most commonly used forms of trade protectionism include tariffs, subsidies, quotas and administrative barriers
   
• A tariff is a tax on imported goods/services (customs duty)
  • The tax raises the selling price of the good/service within the country
       
• The higher price allows more inefficient domestic firms to increase their production and market share
  • More efficient global competitors reduce their output due to the tariff
  • With increased domestic output, employment may increase
     

A tariff raises the price of the world supply from P_W to P_{W +} Tariff. This reduces the quantity of imports from Q₁Q₂ to Q₃Q₄

Diagram Analysis

• World supply (S_W) is considered to be infinite and this supply curve is included with the domestic demand (D_D) and supply (S_D) curves
   
• The pre-tariff market equilibrium is seen at P_wQ₂
  • Domestic firms supply up to Q₁ at a price of P_w
  • Foreign firms supply the difference equal to Q₁Q₂ at a price of P_w (imports)
     
• After the tariff is imposed, the world price increases from P_w to P_w+ tariff
   
• The new market equilibrium is seen at P_w+tariff and Q₄ 
  • Following the law of demand, the quantity demanded contracts from Q₂ to Q₄
  • Following the law of supply, the quantity supplied by domestic firms extends from Q₁ to Q₃
  • The level of imports is reduced from Q₁Q₂ to Q₃Q₄
    

• The best way to consider the impact of a tariff on stakeholders is to explain it using a diagram
  
  

A tariff impacts domestic producers, consumers, foreign producers and the government

The Impact of Tariffs on Stakeholders