A:

Any government regulation naturally creates inefficiencies in a pure supply and demand marketplace. When it comes to the domestic industries, the only beneficiaries of tariffs are the domestic producers and suppliers that can charge higher prices with less foreign competition.

The inefficiency arises because a tariff naturally constricts the quantity of goods and services in an industry with stable demand, increasing the average price for those goods and services, creating deadweight loss and inefficient prices for domestic consumers.

Tariffs

A tariff is a tax imposed by a domestic government on the import of foreign goods and services with the aim of increasing the price of foreign products and induce domestic consumers to purchase the theoretically lower-priced domestic goods.

The idea behind a tariff is to protect and cultivate developing domestic industries. If a developing country wanted to increase the innovation in the Internet sector, for example, it could place a tariff on the bandwidth of foreign Internet companies, forcing them to pay higher hosting and serving costs to send their content to the developing country. This would allow domestic companies time to compete with the foreign players due to lower costs.

How Tariffs Create Inefficiencies

While tariffs are good in theory, they hurt domestic consumers. Using the example above, many developed countries such as the United States have extremely efficient Internet companies that can do a lot of good overseas. Barring domestic consumers access to these Internet resources to allow domestic companies to compete hurts the domestic consumer by not allowing him the best range of options and pricing.

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