Tarrifs

 

James K Polk

In four short years he met his every goal
He seized the whole southwest from Mexico
Made sure the tariffs fell
And made the English sell the Oregon territory
He built an independent treasury
Having done all this he sought no second term
But precious few have mourned the passing of
Mister James K. Polk, our eleventh president
Young Hickory, Napoleon of the Stump

Tariffs have been used by long been used by governments to ensure that price equations do not work against a nation’s interest.

Microeconomics teaches that at an equilibrium of supply, the price will be where marginal revenue is equal to marginal cost.  This is only the first derivative of these equations though.  The revenue equation is:

Revenue = price  * quantity sold.

The cost equation is:

cost = fixed cost + variable cost * quantity sold

Tariffs are imposed when a producer will not be competitive in their own county.  A county might then decide that it is in their interests to impose a tariff such that the quantity sold in their country will be closer to the quantity produced in their county. This changes the cost equation to

cost = fixed cost + variable cost * quantity sold + tariff* quantity sold

This can happen because the combination of fixed costs and variable costs are  higher in one country compared to another country.  Even though variable costs are comparable, fixed costs can be higher in one county compared to another.  Technically since fixed costs are allocated among the quantities sold, the complete cost equation is:

cost =((fixed cost)/(quantity sold)  + variable cost) * quantity sold + tariff* quantity sold

The first derivative of this equation also supports the classical  equation of price. But for an individual producer, when the fixed costs are high and/or the quantity sold is low, the fixed costs can not be ignored.  That is traditionally why tariffs are imposed.  When the ratio of fixed cost to quantity sold is the same for every producer,  or are close to zero, the variable costs in different countries might still be different, and account for considerable different in costs excluding tariffs.  For example, variable costs  may include child labor, wage, safety or environmental laws and regulations in one country that are not imposed in another.  Tariffs are not often imposed to equalize  the differences in variable costs caused by various laws and regulations.  This mean that producers can move to another country to avoid laws and regulations to lower their own variable costs.  This defeats the purpose of those laws and regulations.  As long as producers can move to avoid  laws and regulations, if tariffs are not imposed, then these laws and regulations are meaningless.

Tariffs are often enacted to protect the fixed cost ratio,  because the fixed cost of starting up when the quantity sold will be low, won’t be zero.  If laws and regulations concerning variable costs are important, then shouldn’t tariffs protect them too?