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IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

India imposes a tariff on imported steel. Compared with free trade, which outcome is most consistent with standard economic analysis for a small open economy?

A tariff raises the domestic price above the world price. Domestic producers gain and the government earns revenue on remaining imports, but consumers lose more than these gains, leaving a net deadweight loss from overproduction and reduced consumption.

  1. ADomestic price rises, domestic producers gain, consumers lose, and there is a deadweight lossCorrect
  2. BDomestic price falls and consumers gain
  3. CWorld price rises by the full amount of the tariff
  4. DDomestic producers lose because imports become dearer
  5. Government revenue falls because imports increase

Explanation

A tariff raises the domestic price above the world price. Producers gain surplus, consumers lose more surplus, and the government collects revenue on remaining imports. Part of the consumer loss is not recovered by anyone, which is the deadweight loss.

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