situation where the MB >MC, and we see an underallocation of resources in the rental
apartment market. This policy, intended to help low-income families, creates a situation
where “too little” of the good is produced.7.3 Trade Barriers
Main Topics: Tariffs, Quotas
The issue of free trade is hotly politicized. Proponents usually argue that free trade raises
the standard of living in both nations, and most economists agree. Detractors argue that
free trade, especially with nations that pay lower wages than those paid to domestic work-
ers, costs domestic jobs in higher-wage nations. The evidence shows that in some industries,
job losses have certainly occurred as free trade has become more prevalent. To protect
domestic jobs, nations can impose trade barriers. Tariffs and quotas are among the most
common of barriers.Tariffs
In general, there are two types of tariffs. A revenue tariff is an excise tax levied on goods
that are not produced in the domestic market. For example, the United States does not pro-
duce bananas. If a revenue tariff were levied on bananas, it would not be a serious impedi-
ment to trade, and it would raise a little revenue for the government. A protective tariffis
an excise tax levied on a good that is produced in the domestic market. Though this tariff
also raises revenue, the purpose of this tariff, as the name suggests, is to protect the domes-
tic industry from global competition by increasing the price of foreign products.90 á Step 4. Review the Knowledge You Need to Score High
QuantityPrice $
S 0D 0Q 0P 0PcshortageQs QdMB>MCFigure 7.15TIP- A price ceiling is installed when consumers feel the market equilibrium price is
“too high.” - A price ceiling creates a permanent shortage at a price below equilibrium.
- The more price elastic the demand and supply curves, the greater the shortage.
- The price ceiling reduces net benefit by underallocating resources to the production
of the good.
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