Tariff
A tariff is a tax imposed by a government on goods imported into (or sometimes exported from) a country. Tariffs are one of the oldest and most common instruments of trade policy, used to raise revenue and to protect domestic industries from foreign competition.[1]
Definition
A tariff is a border tax levied on traded goods. It may be ad valorem (a percentage of the value of the good), specific (a fixed amount per unit), or a combination of the two. The tariff raises the domestic price of the imported good, reducing imports and shifting demand toward domestic production.[1]
Effects
| Effect | Description |
|---|---|
| Price | Raises the domestic price of the imported good. |
| Quantity | Reduces the quantity of imports. |
| Domestic producers | Benefit from higher prices and reduced competition. |
| Consumers | Pay higher prices; consumer surplus falls. |
| Government | Collects tariff revenue. |
| Welfare | Overall loss due to deadweight loss, unless used to correct a market distortion. |
The welfare effects of a tariff can be analysed using the tools of supply and demand: a tariff reduces consumer surplus, increases producer surplus, and generates government revenue, but the net effect is a loss of welfare due to the reduction in trade. The distribution of the gains and losses depends on the relative elasticities of supply and demand.[1]
Types
- Ad valorem tariff — a percentage of the value of the imported good.
- Specific tariff — a fixed charge per unit.
- Compound tariff — a combination of ad valorem and specific elements.
- Protective tariff — designed to shield domestic industries.
- Revenue tariff — designed primarily to raise government revenue.