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- a TAX (import duty) levied by a country on IMPORTS of products from foreign countries which may increase their prices in the domestic market. There are two main types of tariff;
- an ad valorem duty which is levied as a fixed percentage of the value of the product;
- a specific duty which is levied as a fixed sum of money per physical unit of the product.
Governments impose tariffs primarily to protect domestic industries from overseas competition, in order to maintain a local production base and to prevent job losses. Additionally, governments use tariffs to assist the BALANCE OF PAYMENTS, and also as a means of raising revenue.
Since 1950, the tariffs which were once applied at substantial rates on an extensive range of internationally traded products have been either reduced or eliminated, as a result of the work of the WORLD TRADE ORGANIZATION and the formation of various free trade blocs. (See TRADE INTEGRATION).
Firms facing tariff obstacles to overseas markets may choose to absorb the duties payable by lowering profit margins, or they may be able to remain price-competitive by increasing productivity and reducing their supply costs. A further option open to MULTINATIONAL ENTERPRISES is for them to replace exporting by setting up manufacturing plants in the markets concerned. See PROTECTIONISM, DEINDUSTRIALIZATION, FOREIGN MARKET SERVICING STRATEGY, LOCAL CONTENT RULE.
- a charge for the consumption of a product or service, for example a meals tariff at a restaurant, or a tariff for gas and electricity supplies. Two-part tariffs are often used in connection with the supply of gas, electricity telephone services etc., involving a charge per unit of the good or service consumed, plus a fixed annual or quarterly charge to cover overhead costs. Two-part tariffs can be used by PUBLIC UTILITIES or firms to achieve the benefits of marginal cost pricing whilst raising sufficient revenues to cover total outlays (so avoiding a deficit). Additionally multi-part tariffs can be utilized to reflect the different marginal costs involved in offering products such as electricity, and rail and bus services at peak and off-peak periods.
See COST-BASED PRICING.
import levya duty (a form of TAX) that is levied on IMPORTS. There are two main types of tariff:
- ad valorem duty, which is levied as a fixed percentage of the value of the good;
- specific duty, which is levied as a fixed sum of money per physical unit of the good. Tariffs are used to protect domestic industries from foreign competition and to raise revenue for the government.
The economic effects of a tariff are illustrated in Fig. 180. In the figure, DD and SS are the domestic demand and supply curves of good X. In a closed economy assuming perfect competition, the domestic price is OP1. Consider now an open-economy situation, with the world price for this particular good being OP2. Assuming that the country's demand for good X accounts for only a small fraction of total world demand for the good, such that it is unable to affect the terms of trade of the good, then, under conditions of FREE TRADE, the domestic price will also be OP2. At price OP2, domestic consumption is Ob, domestic production is Oa, and imports, being the difference between the two, are equal to ab.
The imposition of a specific tariff, T, will cause the domestic price of imports to rise by the full amount of the duty, to price OP3 in the figure. At price OP3, domestic consumption falls from Ob to Od, domestic production increases from Oa to Oc, and imports are reduced from ab to cd. The area YZLM (import volume cd times tariffper unit OP2 OP3) represents government revenue from the tariff.
Although producers of the protected good gain by now being able to increase their supply of the good (that is, from Oa to Oc), the overall effect of the tariff is to reduce the productive efficiency of the economy and consumer welfare. The triangle XYZ represents the ‘production loss’ to the economy. Under conditions of full resource employment, production in the tariff-protected industry can be increased only by diverting resources away from other (nonprotected) industries, which rank higher in the order of productive efficiency. Thus, some resources are allocated less efficiently as a result of the tariff. The triangle LMN represents the ‘consumption loss’ (loss of CONSUMERS’ SURPLUS) to society. As a result of the tariff, some buyers are forced to switch to less desirable substitute products while those consumers continuing to buy the good are now forced to pay a price for it that is in excess of the real economic costs of supplying it.
How effective the tariff is as a means of protecting the domestic industry will depend upon the PRICE-ELASTICITY OF DEMAND for the imported good. If import demand is highly price-inelastic, there will be little reduction in the volume of imports. In these cases, a more effective means of protection is a QUOTA that places a physical ceiling on the amount of imports permitted. See also PROTECTIONISM, NOMINAL RATE OF PROTECTION, EFFECTIVE RATE OF PROTECTION, WORLD TRADE ORGANIZATION, TRADE CREATION, TRADE DIVERSION.