Application Exercise 8l: How tariffs work
App Ex 8L: How tariffs work
Company A (Australian maker of jeans)
Company B (Importer of jeans)
$42 ($30 + $12 tariff)
Cost to consumers (assume a 100% mark-up)
$80 (cost x 2)
- Describe the effect of the tariff on the following economic agents in the Australian economy:
a. The consumer (buyer of jeans)
The consumer (buyer of jeans) pays more for their jeans. They either choose from the (now) cheaper Australian jeans at $40 or the imported jeans at $42. Previously they could have bought jeans for $30. Their material living standards (access to goods and services) has fallen.
b. The Australian manufacturer of jeans
The Australian manufacturer of jeans doesn’t pay the tariff, so their costs don’t change, and they still sell their jeans for $80. However, the relative price of their jeans has now fallen for consumers (since the price of imported jeans has risen), making the local producer more competitive in the jeans market, and therefore likely to make more sales.
c. The Australian business importing jeans to sell
The Australian business importing the jeans to then sell are now paying an extra 40% tariff on the cost of their jeans. This tariff needs to be paid to the government, so does not represent a benefit for the importer. Rather it simply means that, if they plan to maintain their profit margin (the mark up) the price of their jeans has risen against the locally made jeans, making the imported jeans less competitive in the market.
d. The Government of Australia
The government receives the revenue from the tariff ($12 per pair of jeans). They may also benefit from politically from ‘protecting’ the jobs of local workers, by making locally-produced, tariff protected clothing (jeans) safe from competition from cheaper imports.
- Write two sentences explaining why removing tariffs on imported products may be beneficial to Australian living standards.
Removing tariffs can be beneficial for Australian consumers and also for businesses that use imported inputs. If a business uses an input into production that they import from overseas, if that input has a tariff imposed on it, that raises the price of the input and therefore the cost of production. This can lead to higher costs of production and higher inflation in Australia, lowering living standards. Removing tariffs does the reverse.
- Consider how the local producer (Company A) may respond to the higher prices charged by its competitor for their jeans (Company B) if Company A had the market power to raise their own prices.
If Company A had the market power to raise their own prices (e.g. if they were an oligopolist or a monopolist who face very little competition) they may choose to raise the prices of their own jeans, rather than keep them lower than the now-inflated imported jeans.
- Write two sentences explaining possible ‘losers’ in the removal of tariffs on imports into Australia.
Possible losers in the removal of tariffs on imports into Australia include the companies that compete with imports including in this case clothing manufacturers. It would also include the workers who work in this industry who may lose their jobs (and become unemployed) if these producers close down.