"While the imposition by a country's government of an import tariff on a good clearly injures the country's domestic consumers of the good, the tariff helps
domestic import-competing producers and enhances overall country welfare
(i.e., the "net welfare effect" is positive). Similarly, the granting of an export
subsidy by the country's government to home producers of a good also injures
home consumers of the good, but the subsidy helps home producers and enhances overall country welfare."Utilizing traditional supply/demand analysis, illustrate and explain the parts of the above statement that are True (if any) and the parts that are False (if any). (You can use a "small-country" case throughout your answer. Also, assume that there are barriers to the import of the good into the country granting the export subsidy.)

Question

Quizplus · Accepted Answer

The Answer is The statement provided contains both true and false elements when analyzed using traditional supply and demand analysis in a small-country case.

True:
- Imposition of an import tariff on a good does injure the country's domestic consumers of the good. This is because the tariff increases the price of the imported good, leading to a decrease in quantity demanded by domestic consumers.
- The import tariff helps domestic import-competing producers. This is because the higher price of the imported good makes domestic goods relatively more attractive, leading to an increase in quantity supplied by domestic producers.
- The granting of an export subsidy by the country's government to home producers of a good does injure home consumers of the good. This is because the subsidy allows home producers to lower their prices, making their goods more attractive than imported goods, leading to a decrease in quantity demanded by domestic consumers.

False:
- The statement that the import tariff and export subsidy enhance overall country welfare is false. In traditional supply and demand analysis, the imposition of an import tariff leads to a deadweight loss, as the higher price reduces consumer surplus and the increase in domestic production does not fully offset this loss. Similarly, the granting of an export subsidy leads to a deadweight loss, as the subsidy increases producer surplus but does not fully compensate for the loss in consumer surplus.

In conclusion, while the parts of the statement regarding the impact of import tariffs and export subsidies on domestic consumers and producers are true, the assertion that these policies enhance overall country welfare is false when analyzed using traditional supply and demand analysis.

"While the Imposition by a Country's Government of an Import