Economics Micro & Macro (CliffsAP)

The downside is that while jobs and firms are being saved in the steel industry domestically, other industries will suffer
from an increase in the price of steel. The price increase may trigger a price level increase and/or an increase in unem-
ployment in other industries.

Recall that the United States government’s other option is to impose tariffs on imported steel. A tariff is a tax on imported
goods and services. Tariffs are used to limit the supply and create revenue for the government. Figure 12-4 illustrate the
impacts of tariffs on price and quantity.

Figure 12-4

We can see that the effects on supply and demand are similar to when a quota is placed on imported goods. In Figure
12-7, a tariff is placed on imported steel. This makes it more expensive for international producers of steel to sell steel
in the United States. The supply curve for the international firm decreases, causing an increase in price and a decrease
in quantity available. Tariffs also generate revenue for the government. International firms are forced to pay the tax to
the government on either a per-unit or lump-sum basis.

As a result of a tariff, the domestic demand shifts to the right because once again consumers are substituting interna-
tional steel for U.S. steel. An increase in demand means an increase in the price of domestic steel.

The downside is that, as with a quota, tariffs may be only a temporary way of saving employment. Jobs may be saved in
the steel industry; however, other industries may experience negative effects because of the steel industry’s high prices.
Other industries may lose employment and demand as a result of the increase in steel prices.

What it all means is that with quotas, the government is giving the international firm the right to increase the price of its
product. Depending on its quality relative to domestic quality, the international firm may still capture enough demand
despite having a higher price than the domestic firm. With a tariff, the government is able to increase its revenue while
directly charging international firms for making their products available in the United States.

Mini-Review

1. What impact on domestic demand does a tariff have?
   A. It decreases domestic demand for the substitute good.
   B. It increases demand for international goods.
   C. It decreases demand for domestic complements.
   D. It increases the demand for domestic goods.
   E. It has no impact on demand.

D

S

Imported Steel

50

P^2

P^1

25

Tariff Steel

No Tariff Steel

D

S

Domestic Steel

50

P^2

P^1

75

D^1

International Economics