Which of the following lists the four direct effects of a tariff on imports?

• A. Decrease in domestic price, increase in imports, reduction in government revenue, and increase in producer surplus
• B. Increase in domestic production, decrease in exports, increase in consumer surplus, and reduction in government revenue
• C. Increase in exports, decrease in domestic production, reduction in government revenue, and increase in consumer surplus
• D. Increase in domestic price, reduction in imports, increase in government revenue, and redistribution of income among groups

Answer: (D)

Verified step by step guidance

1. Understand what a tariff is: a tax imposed by a government on imported goods, which affects prices and quantities in the domestic market.
2. Identify the direct effect of a tariff on the domestic price of the imported good. Since the tariff adds to the cost of imports, the domestic price typically increases.
3. Analyze how the increase in domestic price affects the quantity of imports. Higher prices usually lead to a reduction in the quantity of imports demanded.
4. Consider the government's revenue from the tariff. Since the tariff is a tax on imports, the government collects revenue equal to the tariff rate multiplied by the quantity of imports.
5. Recognize the redistribution of income among groups: producers benefit from higher prices (increased producer surplus), consumers lose due to higher prices (decreased consumer surplus), and the government gains tariff revenue, reflecting a shift in income within the economy.