Question

Of these three choices - tariffs, quotas, and free trade-economists like the most and the least. (LO5) a) tariffs, quotas d) free trade, quotas b) tariffs, free trade e) quotas, free trade c) free trade, tariffs f) quotas, tariffs

Short answer

Economists like free trade the most and tariffs the least, so the correct answer is option (c) free trade, tariffs.

Step-by-step solution

Understanding the Options

Tariffs, quotas, and free trade are three different trade policies that are implemented by governments to regulate international trade. Let's briefly describe these options: 1. Tariffs: A tax levied on imported or exported goods. Tariffs increase the prices of imported goods, making them less attractive to consumers. 2. Quotas: A restriction on the quantity of a particular commodity that can be imported or exported. Quotas limit the amount of a specific product that can be traded between countries. 3. Free Trade: A trade policy that allows for unrestricted exchange of goods and services between countries, with minimal or no government intervention. It promotes competition, efficiency, and consumer choice.

Economists' Preferences

In general, economists prefer policies that promote economic efficiency and welfare. Among the three options, free trade is considered the most economically efficient and welfare-enhancing policy, as it allows resources to be allocated more effectively and enables consumers to access a broader range of products at competitive prices. On the other hand, tariffs and quotas are considered protectionist policies that restrict trade and create inefficiencies. These policies can lead to a decrease in economic welfare and may often benefit specific industries or groups at the expense of others. Therefore, economists least prefer tariffs and quotas compared to free trade.

Finding the Correct Answer

Based on our analysis, economists like free trade the most and tariffs or quotas the least. Among the given options, the choice that matches this preference is: c) free trade, tariffs So, the correct answer is option (c).

Key concepts

Tariffs

Imagine you're at a local market, and there's a fee just to walk through the door; that's much like a tariff in international trade. A tariff is essentially a tax imposed by a government on imported goods. Its purpose is to protect domestic industries by making foreign products more expensive and less competitive.

This action can give local businesses an edge in the market, as consumers might prefer cheaper, domestically-produced goods over costlier imports. However, tariffs can also lead to retaliation from other countries and result in trade wars, which negatively impact global economic growth.

• Tariffs increase consumer prices, reducing purchasing power.
• Domestic industries might get complacent, affecting the quality of products.
• They can escalate into trade disputes harming international relationships.

Moreover, while tariffs might safeguard certain jobs in protected industries, they can inadvertently hurt other sectors of the economy. Consumers and businesses reliant on imported materials might face higher costs, potentially leading to job losses in those industries.

Quotas

Quotas set a stage where there's a finite number of tickets for everyone to attend a popular concert. Analogously, in international trade, a quota is a limit on the quantity of a particular commodity that can be imported or exported. A quota system might protect domestic production by capping the influx of foreign competition, but it often has unintended consequences.

For example, quotas can lead to shortages of certain goods, raising prices and reducing consumer choice. They also don't adjust for shifts in demand, which could lead to inefficiencies. Here's what typically happens with quotas:

• Limit supply, causing price increases for consumers.
• Create trade imbalances favoring some countries over others.
• Encourage smuggling and black markets if demand remains high.

Limiting trade can sometimes preserve domestic industries and jobs, but this is often at a high cost to consumers. Additionally, quotas may provoke retaliation from trading partners, which can strain international relations and create broader economic disruptions.

Free Trade

Now, think of a bustling international bazaar with goods freely exchanged from every corner of the globe without any intervention — that's the essence of free trade. Free trade is the policy that minimizes governmental interference in trading goods and services, removing barriers like tariffs and quotas.

Free trade advocates argue that it leads to greater economic growth by fostering an environment where countries can specialize in producing what they're best at, known as 'comparative advantage'. Consumers benefit from a wider selection of products at lower prices, and overall global wealth can increase as trade becomes more efficient. The advantages of free trade include:

• Better prices and more choices for consumers.
• Increased competition, driving innovation and improvements.
• Promotion of economic growth on a global scale.

Perhaps its most compelling argument is that free trade has the potential to lift countries out of poverty by acceding to larger markets. However, it's important to understand that while free trade has numerous benefits, it may lead to short-term job losses in industries that can't compete internationally. Economists often advocate for measures to assist workers in adapting to these changes.