A tariff can increase the welfare of a "large" country if the favorable terms-of-trade effect is greater than the unfavorable protective effect and consumption effect.

Question

Quizplus · Accepted Answer

A tariff can increase a country's welfare if it promotes an improvement in the country's terms of trade, which leads to benefits that outweigh the negative effects of protective and consumption effects. In a large country, the increase in market power from implementing a tariff may lead to a favorable terms-of-trade effect, which can increase the country's welfare. However, in a small country such as the one shown in the diagram, the country's market power is negligible, and a tariff is more likely to lead to negative effects on welfare.

A Tariff Can Increase the Welfare of a "Large" Country