Source: EconLog
by Jon Murphy
“Economic theory predicts that, except in certain edge cases, tariffs will raise the domestic price of imported goods and services in a country. The way economists present the effects of tariffs to students is generally through a simple supply and demand model …. One of the logical results of this model is that the tariff burden will be shared between buyers and producers, with their respective shares determined by how sensitive each party is to a change in price. Consequently, if the consumer does not pay all of the tariff, some portion of it will be borne by foreign producers, resulting in a possible net welfare gain if the producer surplus gain plus the government tariff revenue gain from foreign producers is greater than the welfare loss of consumers. There are a lot of practical problems with this so-called ‘optimal tariff’ model, and consequently many economists reject its usefulness for policy purposes.” (12/18/24)