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CA Foundation · Business Economics · International Trade

A country imposes a tariff on an imported good that it buys at a price set in the world market, and the country is too small to affect that price. Compared with free trade, which outcome follows in the domestic market?

A tariff on an imported good for a small country raises the domestic price above the world price. Domestic producers respond by producing more, while consumers cut their purchases, and imports fall. The government collects tariff revenue on remaining imports, and consumers lose surplus.

  1. ADomestic price rises, domestic production rises and domestic consumption fallsCorrect
  2. BDomestic price rises, domestic production falls and domestic consumption rises
  3. CDomestic price falls, domestic production rises and domestic consumption falls
  4. DDomestic price is unchanged, but government revenue falls

Explanation

A tariff raises the domestic price above the world price. At the higher price domestic producers supply more and consumers buy less, while the government earns revenue on the remaining imports. Option two reverses the production and consumption responses, which is wrong under normal demand and supply curves.

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