MRU - Tariffs and protectionism

Protectionism: the conomic policy of restraining trade through tariffs, quotas o other regulations that burden foreign producers but not domestic producers.

• Tariff: a tax on imports.

• Quota: restriction on the quantity of goods that can be imported.

A tariff has two effects that influence (reduce) welfare:

• Domestic consumption falls: lost gains from trade.

• Domestic production increases: wasted resources from higher-cost production.

The revenue doesn't affect the net welfare, as it goes to the government.

Tariffs increase prices to consumers so domestic consumption falls, which creates a deadweight loss

Tariffs divert production from low-cost (world) producers to high-cost (domestic) producers and this wastes resources.

Distribution of losses and gains:

• Bad for consumers

• Good for domestic producers

• Bad overall