A tariff is a tax placed on the products of foreign countries sold in another country. Assume, there is a 10% tax on foreign-made automobiles being sold in the United States. Who would bear the incidence of this tax?
Assume that a Japanese car and a similar American car each sell in the United States at a price of $25,000. With the 10% tax on the Japanese car ($2,500), the Japanese company would like to raise the price of its car to $27,500. Whether it can do so or not depends on the price elasticity of demand for Japanese cars. If the demand for Japanese cars is relatively inelastic, the quantity demanded will fall very little at the price of $27,500. This means that buyers do not find Japanese and American cars to be close substitutes. The incidence of the tax would be on the car buyers. On the other hand, if the demand for Japanese cars is relatively elastic, the quantity of Japanese cars demanded will fall considerably at the price of $27,500. This means that buyers will closely substitute between Japanese and American cars. The Japanese company will have to charge a price close to $25,000 in the United States to be able to compete. The incidence of the tariff will be on the Japanese automobile companies.
In technical language, a tariff on a foreign product that has very elastic demand is called an optimal tariff.The price of the foreign product rises very little in the United States. Most of the tariff is paid by the foreign company as reduced profits. The gain, of course, goes to the United States government, who collects the money.
- Research any ten different product areas/categories in Australia: e.g automobiles, computers, phones, machinery, clothing and garments, foods, medicines and medical supplies, etc. For each area
- Examine the existing tariffs.
- Compare the figures with three other countries (try to choose both developing and developed countries).
- What does this say about the demand elasticity for these product categories in Australia? Why do you think this is so? Examine and comment on possible reasons.
- Why do you think demand elasticities vary across countries?
- Do you thing demand elasticities stay constant across time? Why or why not?
- As a common citizen and user of these products what advice would you have for the government?
- As an Australian manufacturer/supplier of these products what advice would you have for the government?