July 17, 2024 

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UNIT ELASTIC: An elasticity alternative in which any percentage change in price cause an equal percentage change in quantity. In other words, any change in price, whether big or small, triggers exactly the same percentage change in quantity. Unit elastic should be compared with other elasticity alternatives--perfectly elastic, perfectly inelastic, relatively elastic, and relatively inelastic.

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Taxes imposed by the government of one nation on imports from other nations. The primary goal of tariffs is to reduce imports and increase domestic production. As taxes, tariffs raise the demand price and lower the supply price, and thus reduce the quantity exchanged. Tariffs are one of three common foreign trade policies designed to discourage imports and/or encourage exports. The other two are import quotas and export subsidies.
Tariffs are foreign trade policies undertaken by domestic government actions that are intended to "protect" domestic production by restricting foreign competition. More specifically tariffs are taxes, either per unit taxes or ad valorem taxes, placed on imports.

The goal of tariff taxes is to increase the demand price paid by domestic consumers (and reduce the supply price received by foreign producers) and thus reduce the quantity of imports from the foreign sector to the domestic economy. With fewer and more expensive imports coming in, buyers presumably turn to domestic production to take up the slack.

The Why of Tariffs

The imposition of tariffs on foreign imports, as well as other foreign trade policies, are commonly justified for at least five of reasons.
  • Domestic Employment: Because foreign imports are produced in other countries by foreign workers, decreasing imports and increasing domestic production also increases domestic employment.

  • Low Foreign Wages: Placing tariffs on imports produced by foreign workers who receive lower wages "levels the competitive playing field" compared to domestic goods produced by higher paid domestic workers.

  • Infant Industry: If foreign imports compete with a relatively young domestic industry that is not mature enough nor large enough to benefit from economies of scale, then tariffs on imports protect the "infant industry" while it matures and develops.

  • Unfair Trade: The foreign imports might be sold at lower prices in the domestic economy because foreign producers engage in unfair trade practices, such as "dumping" imports at prices below production cost. Tariffs then balance the competitive playing field.

  • National Security: Tariffs can also discourage imports and encourage domestic production of goods that are deemed critical to the security of the national economy.
While tariffs and other foreign trade policies can be beneficial to the aggregate domestic economy they tend to be most beneficial, and thus most commonly promoted by, domestic firms facing competition from foreign imports. Domestic firms benefit with higher sales, greater profits, and more income to resource owners. However, by increasing domestic prices and restricting accessing to imports, foreign trade policies also tend to be harmful to domestic consumers.

Sundial Imports to Csonda: An Example

Consider if you will, how one hypothetical country, the United Provinces of Csonda might be inclined to make use of tariffs on foreign imports. Csonda, like any real world sovereign nation, is inclined to implement tariffs and other foreign trade policies that are designed to increase net exports. In particular, Csonda has decided to impose tariffs on one particular good -- sundials. The principal target of Csonda tariffs is the Republic of Northwest Queoldiola, which coincidentally has a comparative advantage in sundial production.

Sundial Tariffs

The left panel in this exhibit contains the domestic Csondan market for sundials. The domestic market demand is represented by the negatively-sloped demand curve, labeled Dc. The domestic market supply is represented by the positively-sloped supply curve, labeled Sc. In the absence of imports, the domestic Csondan market achieves equilibrium at a price of 12 csonds (which is the domestic currency in Csonda). The quantity exchanged at this equilibrium is 200 sundials.

Imports of Queoldiolan sundials changes this domestic equilibrium. The right panel presents the international market for sundials. The import demand curve, labeled Dm, is the shortage derived from the Csondan sundial market for prices less than 12 csonds. The export supply curve, labeled Sx, is based on the surplus generated by the Queoldiolan sundial market (not shown) for prices above 8 csonds.

The international market achieves a sundial price of 10 csonds such that Csonda imports 100 sundials from Northwest Queoldiola. The goal of the Csondan Sundial Manufacturers Association is to reduce the quantity of imports and to increase the price. Click the [Imports] button to highlight this situation.

Now a Tariff

Suppose that the Csondan government imposes a tariff of 2 csond on each Queoldiolan sundial imported into the country.

This tariff causes the export supply curve, Sx in the international market to decrease (shift to the left and upward) to Sx'. The result is a new equilibrium in the international market at 11 csonds. This increases the price in the Csondan sundial market from 10 csonds to 11 csonds. (Half of the 2 csond tariff is paid by the Csondan importers and half is actually paid by the Queoldiolan exporters). A click of the [Tariffs] button reveals the resulting equilibrium condition.

Some of he consequences of this tariff are much as expected, others not.

  • First, the higher price (11 csonds versus 10 csonds) increases the domestic quantity of Csondan sundials produced from 50 to 75 in accordance to the law of supply. Moreover, this higher price also decreases the domestic quantity of Csondan sundials consumed from 250 to 225 in accordance with the law of demand.

  • Second, with these changes in quantity supplied and quantity demanded, there is less of a domestic Csondan shortage of sundials to fill with imports. As such Queoldiolan imports decline from 100 sundials to 50.

  • Third, Csondan sundial manufacturers produce a larger quantity (175 versus 150) at a higher price (11 csonds versus 10 csonds). As a result, more revenue flows to the domestic Csonda producers. They are definitely better off, which is probably the exact result they were seeking.

  • Fourth, Csondan sundial buyers consume a smaller quantity (225 versus 250) and at a higher price (11 csonds versus 10 csonds). They are paying more for sundials and receiving fewer sundials. As a result, they are worse off.

  • Fifth, the Csondan government gains a bit of revenue, 100 csonds to be exact. It collects a tariff of 2 csonds on each of the 50 Queoldiolan sundials imported into the country. This is revenue that the Csondan government had not previously collected. Moreover, it is a tax on the Csondans who purchase the imported Queoldiolan sundials.
While the powers that be in Csonda -- domestic producers and the domestic government -- benefit from this tariff on Queoldiolan imports, the Csondan consumers end up losing out. In addition, the tariff eliminates some of the gains from trade generated by the exchange between Csonda and Northwest Queoldiola which prompted the trade in the first place.

Two Other Foreign Trade Policies

Tariffs are one of three common foreign trade policies that are designed to increase net exports by decreasing imports or increasing exports. The other two are import quotas and export subsidies.
  • Import Quotas: Import quotas are legal restrictions on the quantities of imports that are imposed by the domestic government. Import quotas can be established as a simple aggregate, presumably satisfied on a first-come-first-serve basis. Once the total is reached, then no more imports of the particular good are allowed. Alternatively, the total quota can be divided among foreign producers, perhaps pro-rated based on past imports. While import quotas benefit domestic producers they are harmful to domestic consumers. With fewer imports available in the domestic economy, consumers have fewer choices and those choices more often than not come at higher prices.

  • Export Subsidies: An export subsidy is a payments made directly to domestic producers to encourage exports of production to the foreign sector. This export subsidization effectively increases the overall revenue received by the domestic firms when exporting production, which is bound to encourage exports. Export subsidies are usually justified as a means of helping domestic producers compete with lower cost imports. While imports might have lower costs due to comparative advantage, they also might be subsidized by foreign governments. Unlike tariffs and import quotas, domestic consumers, like domestic producers, tend to benefit from lower prices of both imports and domestic production. However, domestic taxpayers end up paying for this subsidization.


Recommended Citation:

TARIFFS, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: July 17, 2024].

Check Out These Related Terms...

     | foreign trade policies | import quotas | export subsidies | terms of trade | gains from trade |

Or For A Little Background...

     | international market | international trade | comparative advantage | law of comparative advantage | exports | imports | net exports | foreign trade |

And For Further Study...

     | balance of trade | balance of trade surplus | balance of trade deficit | balance of payments | foreign exchange market |

Related Websites (Will Open in New Window)...

     | World Trade Organization | North American Free Trade Agreement | General Agreement on Tariffs and Trade | European Union |

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