Economics – Effectiveness of policy options to meet all macroeconomic objectives | e-Consult

(a) Explanation of Tariff Effects

Price and Quantity Effects: The tariff increases the price of steel for UK consumers and businesses. This is because the UK government is effectively adding a cost to imported steel. The diagram shows that the tariff raises the world price of steel faced by UK consumers and producers. This leads to a decrease in the quantity of steel consumed and produced in the UK. The quantity of steel traded between the UK and the rest of the world will also decrease, as the tariff makes imported steel more expensive.

Diagram Explanation: The tariff shifts the world supply curve upwards. This results in a new equilibrium with a higher world price and a lower quantity traded. The UK's domestic demand curve shifts to the left due to the higher price, leading to a smaller quantity consumed domestically. The difference between the world price and the price received by UK producers is the tariff revenue for the UK government.