In a largecountry case, an optimal tariff would be:
A)one that increases the producer surplus.
B)one that raises the price of the product imported.
C)one in which the termsoftrade gain exceeds the deadweight loss.
D)one that easily passes the legislative process.

Question

In a large­country case, an optimal tariff would be:
A)one that increases the producer surplus.
B)one that raises the price of the product imported.
C)one in which the terms­of­trade gain exceeds the deadweight loss.
D)one that easily passes the legislative process.

Quizplus · Accepted Answer

An optimal tariff is one that maximizes the net welfare of the home country. In a large country case, an optimal tariff would be one in which the terms-of-trade gain (the increase in the price of exports relative to imports) is greater than the deadweight loss (the reduction in consumer surplus and producer surplus due to the introduction of the tariff). This is because the large country has the market power to affect world prices, and can thus gain from the tariff by increasing the price of its exports. Therefore, choice C is the correct answer. Choices A and B do not necessarily lead to an optimal tariff, as they focus only on the producer surplus or the price of imports, respectively. Choice D is irrelevant, as the ease of passing the legislative process does not determine whether a tariff is optimal or not.

In a Large­country Case, an Optimal Tariff Would Be

In a Largecountry Case, an Optimal Tariff Would Be