Which of the following best describes the long-term effect of tariffs and other trade barriers on an economy?

• A. They lead to sustained increases in global trade volume.
• B. They tend to reduce overall economic efficiency and welfare by distorting market outcomes.
• C. They eliminate the need for domestic industries to innovate.
• D. They permanently increase domestic consumer surplus.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the role of tariffs and trade barriers. Tariffs are taxes imposed on imported goods, and trade barriers include any restrictions that limit international trade, such as quotas or import bans.
2. Step 2: Analyze how tariffs affect market outcomes. Tariffs increase the price of imported goods, which can protect domestic producers but also raise prices for consumers and reduce the quantity of trade.
3. Step 3: Consider the concept of economic efficiency. Economic efficiency occurs when resources are allocated in a way that maximizes total surplus (consumer plus producer surplus). Tariffs distort prices and resource allocation, leading to deadweight losses.
4. Step 4: Evaluate the long-term effects on welfare. While tariffs may temporarily protect certain industries, they generally reduce overall welfare by causing inefficiencies, reducing competition, and limiting consumer choices.
5. Step 5: Conclude that tariffs and trade barriers tend to reduce economic efficiency and welfare by distorting market outcomes, rather than increasing global trade volume, eliminating innovation needs, or permanently increasing consumer surplus.