A country can actually improve its well-being if it is in a position to impose a non-zero "optimal tariff." Explain what an optimal tariff is, what conditions must be in place to implement an optimal tariff, and how such a tariff will increase national welfare. Assuming a country could impose an optimal tariff, would you suggest it do so? Justify your answer.
What will be an ideal response?
POSSIBLE RESPONSE: An optimal tariff is a tariff which maximizes the well-being of a country. It is measured by the gain in tariff revenue that is essentially paid by the foreign exporters to the government of the importing country minus the loss associated with the consumption and production effects arising from the tariff. A country can gain by a tariff only if the country is large enough to influence the international price of the imported product by restricting its imports. In other words, the country must collectively have monopsony power, even in cases in which no individual buyer within the nation has it. By imposing a tariff the country can improve its terms of trade, and may experience a net gain. One needs to exert caution when advising government officials on the implementation of a tariff. Such a decision should incorporate the eventuality that the trading partners of this country may retaliate by imposing trade restrictions on its exports.
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