Figure 33-1 The Deadweight Loss of a Tariff

33.2 Methods of Protection

We now go on to explore the effects of two specific protectionist policies.
Both cause the price of the imported good to rise and the quantity
demanded by domestic consumers to fall. They differ, however, in how
they achieve these results.

Tariffs

A tariff, also called an import duty, is a tax on imported goods. For
example, consider a Canadian firm that wants to import cotton T-shirts
from India at $5 per shirt. If the Canadian government levies a 20 percent
tariff on imported cotton shirts, the Canadian firm pays $5 to the Indian
exporter plus $1 (20 percent of $5) in import duties to the Canada
Revenue Agency. The immediate effect of a tariff is therefore to increase
the domestic firm’s cost to $6 per T-shirt. This tariff has important
implications for domestic consumers as well as domestic producers. The
effect of a tariff in a competitive industry is shown in Figure 33-1.