Question

In a large-country case, an optimal tariff would be:

A. one in which the terms-of-trade gain exceeds the deadweight loss.
B. one that easily passes the legislative process.
C. one that increases the producer surplus.
D. one that raises the price of the product imported.

Answer 1

An optimal tariff for a large country is one where A. the terms-of-trade gains are greater than the deadweight loss, not merely one that raises import prices or benefits domestic producers.

Step-by-step explanation:

In a large-country case, an optimal tariff would be one in which the terms-of-trade gain exceeds the deadweight loss. This is because the optimal tariff aims to maximize the welfare of the imposing country by altering the terms of trade in its favor. While such a tariff could indeed raise the price of the product imported and potentially increase producer surplus, the key factor in determining its optimality is that the terms-of-trade gains surpass any efficiency losses incurred through deadweight loss. Tariffs can lead to decreased imports, thus protecting domestic industries but also have consequences such as higher prices for consumers and potential retaliation from other countries.