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Tariffs and quotas can potentially benefit domestic producers of protected products. Which of the following arguments do economists make?a. Non-tariff barriers are more economically efficient.b. This has almost no effect on foreign consumers and foreign producers.c. The gains to domestic consumers are even higher because of lower prices.d. The societal gains from free trade are greater as a result of specialization

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Question:

Tariffs and quotas can potentially benefit domestic producers of protected products. Which of the following arguments do economists make?

A) Non-tariff barriers are more economically efficient.

B) This has almost no effect on foreign consumers and foreign producers.

C) The gains to domestic consumers are even higher because of lower prices.

D) The societal gains from free trade are greater as a result of specialization

       

Answer:

The correct answer is D) The societal gains from free trade are greater as a result of specialization.    

Explanation:

There are two key words to look at here:

Free Trade and Specialization

Free trade means that countries can import and export goods without any tariff barriers or other non-tariff barriers to trade. Essentially, free trade enables

  • lower prices for consumers,
  • increases exports,
  • benefits from economies of scale and
  • a greater choice of goods.

Specialization in economics refers to a situation where a nation  focuses on the production of a limited variety of goods where it has comparative advantage. It oftentimes has to forgo producing other goods and relies on obtaining those other goods through trade. A country has a comparative advantage at producing something if she can produce it at lower cost than anyone else.

Free trade leads to specialization, where a country only produces goods that they are most efficient at, i.e., in which they have a lower opportunity cost. Specialization leads to higher levels of output.

Other benefits of Free trade include but are not limited to:

  1. Efficiency: With free trade, domestic firms face competition pressure from companies abroad and therefore there will be more incentives to cut costs and increase efficiency. Free Trade encourages an efficient utilization of scarce resources.
  2. Free trade enables an increase in consumption as countries can consume combinations of goods outside their production capacity.
  3. Technology transfer occurs more easily with free trade, and this often leads to accelerated improvements in technology.

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