Skip to content

CA Foundation · Business Economics · International Trade

Under an import tariff in a small open economy, the 'deadweight loss' to society arises mainly from:

Deadweight loss from a tariff comes from inefficient over-production by domestic firms, which replace cheaper imports, and from reduced consumption due to the higher price. Transfers to producers and the government are only redistributions, while these two triangles are lost to everyone.

  1. ATransfer of surplus from consumers to the government
  2. BTransfer of surplus from consumers to domestic producers
  3. COver-production by inefficient domestic producers and under-consumption by consumers, with no one gaining that valueCorrect
  4. DThe fall in the world price of the good

Explanation

Consumer loss is split into a gain to producers, a gain to government as revenue and two leftover triangles. The triangles represent costlier domestic production replacing cheaper imports and consumption lost because of the higher price. Nobody receives these, so they form the deadweight loss. The transfers are not losses to society as a whole.

Did you get it right without looking?

One question tells you little. A timed set on International Trade shows your real accuracy, how long you take and where you lose marks.

Practise International TradeFree diagnostic mock

More International Trade questions