Question

A tariff makes the total economy: a) worse off because it decreases both domestic consumer surplus and domestic producer surplus. b) worse off because it creates a deadweight loss. c) worse off because it creates revenue for the government. d) better off because it decreases the deadweight loss from international trade. e) better off because it increases the domestic production of the good.

Answer 1

The correct answer is option b.

Step-by-step explanation:

The imposition of tariff on the trade of goods causes the market price of the product to increase. This is beneficial for domestic producers as the producer surplus.

The government is also benefited by the imposition of tariff as it creates revenue for the government.

Though it reduces the consumer surplus as the consumers now have to pay a higher price. This creates a deadweight loss which makes the overall economy worse-off.

The loss in consumer surplus is greater than gain in producer surplus and government which makes the economy worse-off.