Question

Some economists have argued that, because domestic consumers gain more from free trade than domestic producers gain from (import) tariffs and quotas, consumers should buy out domestic producers and rid themselves of costly tariffs and quotas. If this was feasible, would you be in favor? If there is a net loss to society from tariffs, why do tariffs exist?

Answer 1

The reason the tariffs exists:

The shift from tariff along free trade increases the consumer surplus as compared to the decline in the producer surplus. By this consumers can compensate the producers for the loss they have faced.

However,there are various other problems in relation to the shift. Generally, there will be a transaction cost of tariff besides the producer's loss surplus. There are several non economic issues that stimulates local producers to go on with tariff instead of getting compensation for the economic loss.

Generally, tariffs are imposed for any one of the following reasons,

• To protect newly established domestic industries from foreign competition.
• To limit the number of imports.
• To protect local producers from getting dumped by foreign companies.
• To raise revenue.