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Which of the following best explains why trade barriers can be harmful to an economy, considering the concepts of externalities, social benefits, and social costs?
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7. Externalities
Externalities: Social Benefits and Social Costs
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A negative result of high tariffs is that they can sometimes lead to which of the following?
A
increased consumer surplus
B
greater international competition
C
deadweight loss due to reduced market efficiency
D
lower prices for domestic consumers
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Understand the concept of tariffs: A tariff is a tax imposed on imported goods, which generally raises the price of those goods in the domestic market.
Analyze the effect of tariffs on consumer surplus: Since tariffs increase the price of imported goods, domestic consumers usually face higher prices, which tends to decrease consumer surplus rather than increase it.
Consider the impact on international competition: Tariffs protect domestic producers by making imported goods more expensive, which typically reduces international competition rather than increasing it.
Identify the concept of deadweight loss: Deadweight loss occurs when market efficiency is reduced due to distortions like tariffs, leading to lost gains from trade and a reduction in total welfare.
Conclude that high tariffs can cause deadweight loss due to reduced market efficiency, which is a negative outcome, while lower prices for domestic consumers are unlikely because tariffs raise prices.
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