Tariff Intervention
Government policies on tariff intervention may create external costs or benefits to the consumers. These are the externalities to the tariff intervention policies. The direct effect of tariff intervention policies are the changes in the amount of taxes paid by the manufacturers to the government (Tullock, 2005). When the tariff intervention policies increase the tariffs, the producers increase the amount of taxes paid to the treasury. When the policies are implemented to reduce the tariffs, the producers pay fewer taxes to the revenue authorities. The indirect effect of any increase or decrease in the tariffs is that the producers pass on the changes in the amount of taxes paid to the consumers. When the tariffs are increased, the producers provide higher prices for the products. When the government reduces the tariffs, the producers pay fewer amounts of taxes and this is reflected on the low prices imposed to the consumers (Weitzman, 1974).
Tariff intervention refers to the policies that the government uses to increase or decrease the tariffs to the exports or imports. The policies are established to promote trade within the domestic market or to improve the welfare of the consumers. When the government implements a tariff intervention policy which promotes domestic firms, competition decreases and the firms can offer higher prices in the domestic markets (Tullock, 2005). Such policies are implemented to protect the domestic or infant industries in the domestic market. Tariff intervention policies by the government to promote international trade are implemented to improve the welfare of the consumers. When the tariff policies are established to reduce the prices, the consumers purchase the commodities at a reduced price. These policies are also established to encourage the domestic firms to be efficient in their production processes (Weitzman, 1974).
External costs
Tariff intervention may be enacted to increase the tariffs on the goods imported to the country. This is an intervention to protect the domestic industries. The increase in tariffs protects the domestic firms from external competition and this causes an increase in the domestic prices. The international prices are usually lower than the domestic prices. When the economy is opened to the international trade, the domestic firms encounter competition and they are forced to reduce their prices. When tariffs are imposed, the social cost increases to the consumers due to an increase in the domestic prices of commodities. People purchase the goods at a higher price. The purchasing power of the consumers is decreased since the domestic prices are higher, that is, the consumers can purchase fewer commodities with a given amount of income. Consumers incur extra costs to purchase the commodities. Therefore, the quantity of products that can be purchased by a consumer at a given income level declines (Tullock, 2005).
Source Weitzman (1974).
From the diagram, the private cost indicates the position of the consumers before the tariff intervention. The consumers purchase Qr quantity of the commodities at price Pp. This creates an equilibrium. The consumers are satisfied by the price and quantities in the market. The demand and supply are balanced. When the tariff intervention policies are implemented, the suppliers raise the prices for the commodities. This reduces the purchasing power of the consumers and lesser quantity of the commodities is purchased. The social cost curve indicates the new supply position in the market. A new equilibrium is set at a higher level than the previous one. The difference in consumption is represented by the gap Qs-Qr. The price increase is represented by the gap Ps-Pp. The loss to the consumers due to the tariff intervention is measured by the price difference Pp-Ps. It can also be measured by the difference in quantity of commodities consumed Qr-Qs (Weitzman, 1974).
External benefits
When tariff intervention policies are implemented to encourage imports, more foreign commodities penetrate the domestic market at a lower price. The governments implement such policies to improve the welfare of the consumers as well as encourage the domestic firms to be efficient in their production. The international prices are usually lower than the domestic prices. When the government reduces the tariffs on the products traded in the international prices, the domestic prices will have to reduce. The consumer welfare is improved since the purchasing power is increased. The consumers can purchase more of the same commodities with a given amount of income. More quantities are purchased by the consumers (Tullock, 2005).
Source Weitzman (1974).
From the above diagram, reduction in the tariffs causes the domestic prices to decrease from Ps to Pp. The quantity consumed in the market is increased from QP to Qs. Before the tariff intervention, the consumers purchased Qp quantity of the commodities at price Pp. This created an equilibrium at the point actual equilibrium. When the government implements the tariff intervention policies, the prices decline from Ps to Pp. The consumers now consume Qs quantity of the commodity. This is an increase in the quantity consumed. The new equilibrium rises to ideal equilibrium. The gainsbenefits to the consumers due to the tariff intervention is measured to be the difference Ps-Pp in terms of price. In terms of quantity consumed, the benefits are measured by the difference Qs-Qp (Weitzman, 1974).
Conclusion
The tariff intervention policies should be established according to the prevailing economic circumstances. A government that is willing to promote the welfare of its people will implement tariff intervention policies which reduce the domestic prices. When the domestic firms experience competition from the international market, they will improve their production process. Efficiency in production will encourage production at low cost and provision of a variety of products in the market. A government which is willing to promote the success of the domestic industries will implement tariff intervention policies which will increase the domestic prices. When the domestic prices increases, the producers get higher returns from the sale of the commodities produced. The government should consider the effects of any policy being implemented. Tariff intervention policies will have direct impacts to the manufacturers but the actual burden of the policies will be upon the consumers. Consumers bear the tax burden and hence they are the most affected by the policy changes on tariffs.