For a small country, the sum of the production and the consumption effects indicate the net loss in economic welfare due to the imposition of a tariff.

Question

Quizplus · Accepted Answer

A tariff is a tax imposed on imported goods, which can lead to a decrease in imports and an increase in domestic production. However, this can also lead to higher prices for consumers and reduced choice, leading to a decrease in overall economic welfare. The production effect refers to the increase in domestic production due to the tariff, while the consumption effect refers to the decrease in consumption due to higher prices. The net loss in economic welfare is the sum of these effects, indicating that for a small country, the loss is greater than any potential gain from the tariff.

For a Small Country, the Sum of the Production and the Consumption