The correct answer is option C: “both protective and revenue effects.”

Tariffs, which are taxes imposed on imported goods, can have dual effects on a country’s economy: protective effects and revenue effects. Let’s explore why option C is the correct choice and why the other options are not accurate explanations of the impact of tariffs.

Option C:

Both protective and revenue effects This option accurately captures the multifaceted impact of tariffs on a country’s economy. Tariffs are designed to achieve two primary objectives:

Protective Effects:

Tariffs are often imposed to protect domestic industries from foreign competition. When a country imposes tariffs on imported goods, it increases the price of those goods, making them less attractive to domestic consumers.

This protectionist aspect of tariffs allows domestic industries to compete more effectively against foreign imports by reducing their price disadvantage. As a result, tariffs can provide protection for domestic industries, shielding them from foreign competition and potentially preserving jobs and domestic production.

Revenue Effects:

Tariffs generate revenue for the government. When imports are subject to tariffs, the government collects tariff revenue from importers. This revenue can be used to fund various government programs, services, and public infrastructure. Tariffs are a direct source of government income, and they can contribute to a country’s overall revenue stream.

It’s important to note that the protective and revenue effects of tariffs can vary based on the specific circumstances and policy objectives of the country imposing them. The degree of protectionism and revenue generation depends on the tariff rates, the elasticity of demand for the imported goods, and the behavior of domestic industries and consumers.

Now, let’s examine why the other options are not correct:

Option A:

Only revenue effects This option suggests that tariffs have only revenue effects, which is not accurate. While tariffs do generate revenue for the government, their impact goes beyond mere revenue collection.

As explained earlier, tariffs also serve the protective function of safeguarding domestic industries from foreign competition. Focusing solely on revenue effects overlooks the primary purpose of tariffs as a trade policy tool.

Option B:

Only protective effects This option implies that tariffs have only protective effects, which is also not accurate. While tariffs are indeed used to protect domestic industries from foreign competition, they simultaneously generate revenue for the government.

The dual nature of tariffs allows them to serve both protective and revenue-generating functions. Ignoring the revenue effects of tariffs would provide an incomplete picture of their economic impact.

Option D:

Neither protective nor revenue effects This option asserts that tariffs have neither protective nor revenue effects, which is incorrect. Tariffs are explicitly designed to have these effects.

They are a deliberate policy tool used by governments to influence trade patterns, protect domestic industries, and generate revenue. To claim that tariffs have neither of these effects contradicts their fundamental purpose and impact.

In conclusion, option C, “both protective and revenue effects,” is the correct answer because it accurately reflects the dual nature of tariffs. Tariffs are not only a source of government revenue but also a mechanism for protecting domestic industries from foreign competition.

These two effects coexist and make tariffs a multifaceted trade policy tool used by governments around the world to achieve various economic objectives.