For Each of the Three Statements Below, Illustrate and Explain

Question

Examlex · Accepted Answer

The Answer is (a) The statement is True.

Illustration:
Let's consider a small country that imposes a tariff on an imported good. This tariff will increase the domestic price of the good and reduce the quantity of the good imported. On the other hand, if the supplying countries of the import agree to a voluntary export restraint (VER), the domestic price and quantity of the good imported will also be affected in a similar manner.

Ratinal:
The imposition of a tariff by a small country will have a less negative net welfare effect because the tariff revenue stays within the country, whereas with a VER, the exporting countries receive the revenue from the restraint. This means that the welfare loss from the VER is greater than from the tariff, even if the effects on domestic price and quantity of the good imported are the same in both situations.

(b) The statement is False.

Illustration:
If a country imposes an export tax on a good, it will reduce the quantity of the good exported and increase the domestic price. This will affect the welfare of both small and large countries.

Ratinal:
A small country can potentially enhance its welfare by imposing an export tax because it can capture some of the tax revenue. However, a large country can also potentially enhance its welfare by imposing an export tax, as it can still benefit from the tax revenue and the reduction in domestic price.

(c) The statement is False.

Illustration:
If a small country elects to assist an import-competing industry in expanding its output, it can do so through either an import tariff or a production subsidy. Both forms of assistance will lead to an increase in the industry's output.

Ratinal:
The net welfare effect on the country will not be the same in both situations. An import tariff will lead to a welfare loss due to the distortion of domestic prices, while a production subsidy will also lead to a welfare loss due to the cost of the subsidy. Therefore, the net welfare effect will differ depending on whether the assistance is given in the form of an import tariff or a production subsidy.

For Each of the Three Statements Below, Illustrate and Explain

Definitions: