A tariff that prohibits imports has only
|a. a revenue effect and redistribution effect|
b. revenue effect and protection effect
c. consumption effect and protection effect
d. redistribution effect and consumption effect
The Correct Answer Is:
- c. consumption effect and protection effect
The correct answer is option (c) – a tariff that prohibits imports has the consumption effect and protection effect. Let’s explore these effects in detail and then explain why the other options are not correct.
When a tariff is imposed that effectively prohibits imports, it significantly reduces or eliminates the availability of foreign goods in the domestic market. This, in turn, influences the consumption patterns of consumers within the country. With limited or no access to foreign goods, consumers are forced to rely on domestic alternatives, if available.
As a result, consumers are likely to change their consumption habits by purchasing more of the domestically produced goods. The consumption effect primarily refers to the alteration in consumers’ choices and preferences due to the tariff’s impact on import availability.
A tariff that prohibits imports is primarily aimed at protecting domestic industries. By restricting foreign competition, domestic industries can thrive, as they face less competition and can charge higher prices for their goods. This, in turn, supports and protects domestic producers, ensuring they can maintain or expand their market share and profitability.
Now, let’s examine why the other options are not correct:
a. Revenue Effect and Redistribution Effect:
A tariff that prohibits imports doesn’t generate revenue, as there are no imports subject to the tariff. Tariffs typically generate revenue for the government when they are applied to imported goods. In this case, where imports are essentially banned, there is no revenue effect.
The redistribution effect typically refers to the impact of tariffs on the distribution of income within a country. A tariff that prohibits imports doesn’t have a redistribution effect because it doesn’t generate revenue that could be redistributed through government programs or policies. This effect is more relevant when tariffs are applied to imports, but in the case of a complete prohibition, it doesn’t come into play.
b. Revenue Effect and Protection Effect:
Similar to the previous explanation, a tariff that prohibits imports doesn’t generate revenue, as there are no imported goods subject to the tariff. The revenue effect is only applicable when tariffs are imposed on imported goods to collect revenue for the government.
This option seems plausible at first glance because a prohibition on imports indeed aims to protect domestic industries. However, it doesn’t account for the consumption effect, which is equally important in this context.
The consumption effect, where consumers shift their preferences to domestic goods, is a critical aspect of a tariff that prohibits imports. Hence, the protection effect alone doesn’t fully capture the impact of such a tariff.
d. Redistribution Effect and Consumption Effect:
As explained earlier, the redistribution effect pertains to how tariffs impact the distribution of income within a country. In the case of a tariff that prohibits imports, this effect is not relevant because there’s no revenue generated to be redistributed.
This option partially describes the impact of a tariff that prohibits imports by considering the consumption effect. However, it doesn’t acknowledge the protection effect, which is a significant consequence of such a tariff. The protection effect, which supports domestic industries by reducing foreign competition, is another key element that needs to be considered when evaluating the impact of such tariffs.
In conclusion, a tariff that prohibits imports primarily has a consumption effect, as it alters consumer choices and preferences due to the unavailability of foreign goods, and a protection effect, as it shields domestic industries from foreign competition. This combination accurately reflects the consequences of such tariffs and aligns with option (c) as the correct answer.
The other options do not fully capture the effects of a tariff that prohibits imports, as they either include irrelevant effects (such as revenue or redistribution) or omit essential aspects of the impact (like protection and consumption effects).