What Is The Difference Between Prohibitive And No Prohibitive Tariff?


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Tariq Habib Profile
Tariq Habib answered
The easiest case to analyze is a prohibitive tariff one that is to high that it chokes off all imports. What would happen if the tariff on clothing were more than $4 per unit that is more than the difference between America's no trade price of $8 and the would price of $4? This would be a prohibitive tariff, shutting off all clothing trade. Any importer who buys clothing at the world price of $4 would sell it in America at above the no trade price of $8. But this price would not cover the cost of the good plus the tariff. Prohibitive tariffs thus kill off all trade.

Low tariffs would injure but not kill off trade. The equilibrium in the clothing market with a $2 tariff. Again assuming no transportation costs, a $2 tariff means that foreign clothing will sell in America for $6 per unit.

The equilibrium result of a $2 tariff is that domestic consumption is lowered from 300 units in the free trade equilibrium to 250 units after the tariff is imposed, 50 units raise the amount of domestic production, and 100 units lower the quantity of imports.

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