Answer to Question #49757 in Economics for md

Question

hello, i am struggling with this international EU economics question. 'The optimal tariff for a small country is zero. Prove this statement geometrically and then explain your results'

Answer 1

By definition, a "small country" is one that is unable to influence the price of a good on the world market through buying or selling. This assures that the country will have a horizontal world supply curve at the price PW, regardless of its tariff policy. When a small country applies a tariff to a good, the world price will remain constant at Pw. Tariff revenue will simply be a transfer from consumers to the government. If the country's demand curve is downward sloping, the deadweight cost will always increase proportionately to tariff increases, even if there is no domestic supply. So, the statement is true.