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Tariffs and Quotas: Protectionist Trade Policy

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Who benefits from a tariff or quota? Who loses? What are the positives and negatives of protectionist trade policies on the federal government's part? Which policy is best right now

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Solution Summary

This solution discusses why governments impose tariff's and quotas; it also provides the economic reasoning for why a protectionist trade policy benefits domestic industries along with the effects it has on consumers. This solution is approximately 800 words.

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A. The people who benefit from a tariff or a quota are the people who produce the goods and services on which the tariff/quota has been imposed. A country imports a good only if the world price of the good is lower than the domestic price. This effectively increases the quantity consumed in the domestic market, reduces the price in the domestic market to the world price, and more importantly for the domestic producers reduces the quantity that they can sell in their home market. When the government imposes a tariff or a quota they raise the price of the good in the domestic market and reduce the quantity consumed. Again for the domestic producers it means that they can now sell more since higher price point implies that they will be more competitive with the imports. Thus the total quantity consumed falls but the quantity sold by domestic producers rises.

It is clear from the above discussion that the domestic consumers are the ones who lose as a result of a tariff or a quota. They get to consumer lower quantity of the said good, and have to pay a higher price to get it. Therefore, they are hurt on both ...

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