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Excuse me miss, but why is it that when a large country imposes a tariff, it reduces foreign prices? Could you explain the mechanics behind this, please?
A tax puts a wedge between the price paid by the buyer (it becomes higher than without tax) and the price received by the seller (becomes lower than without tax). When the country that imposes the tariff is *small*, the tariff will not affect the price received by the seller, but the buyers in the small country that imposes the tariff will have to absorb the entire tariff. Yet if the country that imposes the tariff is BIG with many consumers, who consume a large amount of the imported good from the selling country, then the tariff will affect the international price, causing the price received by the seller to drop - the situation is very similar to a typical tax analysis. Don’t’ remember about welfare effect of a tax? Watch the following clips. ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-9IaDOocAGpw.html ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-VcBznrAtSFU.html ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-fbCDOCA_HWU.html
Sure. A tax puts a wedge between the price paid by the buyer (it becomes higher than without tax) and the price received by the seller (becomes lower than without tax). When the country that imposes the tariff is *small*, the tariff will not affect the price received by the seller, but the buyers in the small country that imposes the tariff will have to absorb the entire tariff. Yet if the country that imposes the tariff is BIG with many consumers, who consume a large amount of the imported good from the selling country, then the tariff will affect the international price, causing the price received by the seller to drop - the situation is very similar to a typical tax analysis. Don’t’ remember about welfare effect of a tax? Watch the following clips. ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-9IaDOocAGpw.html ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-VcBznrAtSFU.html ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-fbCDOCA_HWU.html
I saw my professor's ppt says “Large” economy Effect of a tariffs on prices: When “t” is small: • Terms of trade gain are proportional to “t” (product of “t” and current imports) • Deadweight loss proportional to “t2 ” (product of “t” and the change in imports) Terms of trade wins when t is small Gains from having a small tariff I don't understand, can you please explain?Thank you
