ECO402 Microeconomics GDB Solution Fall 2013

The case:

Garments industry in Pakistan has been developed at very fast pace from last few years. There are large numbers of Pakistani garments brands like Bonanza, Outfitters, Breakout, Next, Forecast, Cross road, Chen one etc. These brands are producing quality products with innovative designs. They import some inputs from abroad for the production. Garments brands from all around the world are also supplying their products in Pakistan like Nike, Levi’s, Oxford etc. So this market is highly competitive due to existence of variety of local and foreign brands. Suppose, in order to increase revenue, government has recently raised tariffs on imports of foreign garments products and inputs required for domestic production.

Requirement:

Being a student of economics, you are required to discuss how this government action will affect the local garments industry and the overall economy.

Solution:

Tariff’s increase the cost of imports, leading to a decline in consumer surplus. For example, UK consumers have lost out from EU wide tariffs on agricultural products. Many agricultural goods are more expensive because of the high tariffs placed to protect EU farmers.

It is hard to think of any benefits from tariff’s for consumers. Maybe in the long run consumers benefit from the protection of domestic industries if these industries use the tariffs to improve

Domestic Producers, who produce the good, will benefit from the introduction of tarrifs. This is because it makes their domestic production relatively more attractive compared to the imports. Agricultural tariffs have benefitted European farmers as they have been protected from cheaper competition..

However, it is argued that the restriction of competition encourages inefficient firms. Therefore, in the long run, domestic firms may not make the necessary improvements that they would have done without tariffs.

Also the introduction of tariffs usually leads to retaliation. Therefore, other countries will place tariffs on UK exports. Therefore, some exporting firms will lose out and sell less exports.

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