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Dear Tutor
i will be happy if you will help me, because i read a lot of articles about optimal tariff but stil cant understand the statemand uder
This text from BBP book
“If a country’s imports make up a significant share of the world market for a particular good, an increase in imports is likely to result in the world price of the good rising. The economic agents in the country collectively ‘bid up’ the price of imports.
?n a free market, each individual will buy imports up to the point at which the benefit to the individual equals the world price. Because of the price-raising effect referred to above, the cost to the economy as a whole of the last import exceeds the world price, and therefore exceeds its benefit.”
First part of this statement i uderstand, but about second part which start with free market i cant understand the sence. First i cant undestand what does mean benefit equal to world price. An what does mean last import exceeds the world price.For the first bit, it means that each individual will be prepared to pay provided they decide that the benefit they are getting from the goods is less than the price they have to pay for the goods. (For example, the price you personally will be prepared to pay for bottled water depends on how much benefit you personally think you get from having the bottled water.)
“Breakeven” for you will be when the price being charged is equal to the benefit you feel you are getting.The second bit is not really worded to well, but is saying that if individuals are prepared to pay the current world price, then as a result of the first paragraph of the text, demand will result in the world price increasing and therefore the economy as a whole ends up suffering.
To be honest I am really not sure why BPP has even bothered about this because it is not something that has ever been relevant for the exam. Overall the examiner tries to be practical rather than theoretical in his questions. There are certainly written parts to questions, but they are mainly writing about practicalities rather than economic theory 🙂
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