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

India imposes a tariff on imported steel. Which of the following correctly describes the usual short-run economic effects of the tariff?

The domestic steel price rises, domestic output expands, imports fall, and the government collects revenue on the remaining imports. Domestic producers benefit while users pay more. Deadweight losses arise, so overall welfare is not guaranteed to improve.

  1. ADomestic steel producers lose, and domestic steel users gain from lower prices
  2. BDomestic steel price rises, domestic output rises, imports fall, and the government gains tariff revenue on the remaining importsCorrect
  3. CDomestic steel price falls, and consumption rises
  4. DWorld steel prices rise sharply because India is a price taker
  5. Total economic welfare in India necessarily increases because of the tariff revenue

Explanation

A tariff raises the domestic price above the world price, encouraging domestic production, cutting consumption and imports, and generating revenue on the remaining imports. Domestic producers gain and users lose, the opposite of the first option. There are deadweight losses, so total welfare does not necessarily rise.

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