What is a tariff and how does it typically affect consumer surplus, producer surplus, and total welfare?

• A. Tariffs raise domestic prices; they usually reduce consumer surplus, increase domestic producer surplus, and reduce total welfare due to deadweight losses.
• B. Tariffs reduce domestic prices and boost consumer surplus.
• C. Tariffs have no effect on price or welfare.
• D. Tariffs always improve total welfare for all economies.

Answer: (C)

Tariffs are taxes on imported goods that push the domestic price above the world price. Because of the higher price, consumers buy less, so consumer surplus falls. Domestic producers, facing higher prices, typically gain and expand production, increasing producer surplus. The government collects tariff revenue, which adds to total welfare. But the higher price and restricted imports create deadweight losses: some mutually beneficial trades are not made, and resources are drawn into less efficient domestic production. Overall, these losses usually exceed the gains from higher producer surplus and tariff revenue, so total welfare declines.