🏷️ What Is a Tariff?
Definition: Tariff.
Tariffs are the most common and most visible form of trade protection. They work by artificially raising the price of imports, making domestic goods relatively cheaper.
Types of tariffs
- Specific tariff — a fixed amount per unit imported (e.g. $5 per tonne of steel).
- Ad valorem tariff — a percentage of the import price (e.g. 20% on imported cars).
📊 Tariff Diagram Analysis
The tariff diagram is one of the most important diagrams in IB Economics. You must be able to identify all the effects.
Effects of a tariff
- Price rises from Pw (world price) to Pw + tariff.
- Domestic production increases — domestic firms can now compete at the higher price.
- Domestic consumption falls — higher price reduces quantity demanded.
- Imports fall — the gap between domestic supply and demand narrows.
- Government earns tariff revenue — tariff × quantity of imports = revenue rectangle.
- Deadweight welfare loss — two triangles representing lost consumer and producer surplus (inefficiency).
In your diagram, label: Pw, Pw + t, domestic S and D curves, quantities (Q1 to Q4), tariff revenue (rectangle), and the two deadweight loss triangles. This is a must-know diagram.
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👥 Who Wins and Who Loses?
- ✅ Domestic producers — gain market share, earn higher prices, and increase output.
- ✅ Government — earns tariff revenue that can fund public spending.
- ✅ Workers in protected industries — jobs preserved in the short run.
- ❌ Consumers — pay higher prices and have less choice.
- ❌ Foreign producers — lose market access and export revenue.
- ❌ Overall welfare — deadweight loss means society is worse off overall.
- ❌ Domestic firms using imported inputs — higher costs for raw materials reduce competitiveness.
Tariffs redistribute income from consumers to producers and the government. The net effect on society is negative due to deadweight loss — resources are misallocated away from their most efficient use.