Suppose that there is a negative externality associated with alcohol consumption in the United States (e.g., the costs of publicly funded alcoholism treatment centers). Will the United States be better or worse off if it eliminates all tariffs on alcohol imports?
A) The United States will always be better off when tariffs on imported alcohol are eliminated.
B) The United States will always be worse off when tariffs on imported alcohol are eliminated.
C) The United States will be no better or worse off when tariffs on imported alcohol are eliminated.
D) The United States will be better off only if the private gains from trade exceed the increased social costs of alcohol consumption when tariffs on imported alcohol are eliminated.

Question

Quizplus · Accepted Answer

Eliminating tariffs on imported alcohol may increase the consumption of alcohol, which could exacerbate the negative externality associated with alcohol consumption. Therefore, the United States will be better off only if the private gains from trade (i.e., lower prices and greater variety of alcohol) exceed the increased social costs of alcohol consumption (e.g., increased demand for alcoholism treatment) when tariffs are eliminated. This will depend on the price elasticity of demand for alcohol and the magnitude of the negative externality, among other factors.

Suppose That There Is a Negative Externality Associated with Alcohol