Asked Nov 17, 2019

To what extent do Tariffs maximize total utility for a given population?


Expert Answer

Step 1


Total Utility - Total utility is the sum total of utility derived from the consumption of all the units of commodity.

Whereas the total utility of population the summation of the utility of all the individuals of the given population.

Total Utility = ΣMU

Tariffs on particular commodity will increase price than before which will affect the chooses of consumer.

Example - let in an economy there exists only 2 goods which are x1 and x2 and their respective price is P1 and P2 and We choose the consumer from the population whose  income is m .

Budget equation –

P1x1 + P2x2 = m

The equilibrium condition for a consumer –

(MU1/ MU2)  = (P1/ P2 )

Step 2

Now, the there is a tariff “t” is imposed on good “1” than

New budget equation –

(P1+t) x1 + P2x2 = m  here  P1 + t > P1

the new equilibrium condition for a consumer

(MU1/MU2)  = (P1 + t/ P2)

Similarly with all the consumer in the population

With higher tariffs on commodity affects the equilibrium condition and decrease quantity desired .So, with constant income tariff wil...

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