Economics - International Trade and Capital Flows

why does national welfare decrease in small countries and could increase in large countries in case of tariff and import quota ?

I understand that large countries can reduce the world price , but how is that impacting the national welfare

Welfare likely decreases in small countries as their internal markets are not large enough to support goods producing companies that have the size to capture the efficiencies obtainable from economies of scale. Therefore, establishing import quotas or imposing tariffs raises the domestic price above the world price, resulting in a loss of consumer welfare.

The situation in large economies differs due to the size of the domestic market which allows domestic producers to operate large enough operations to capture scale economies. In large economies, the imposition of tariffs or quotas have the effect of raising the domestic price of the goods impacted by those actions. However, there is not the same efficiency losses as when those import restrictions are imposed in a small country. There is a welfare transfer away from consumers in favor of the companies (and their workers) in the industries benefited by the reduced import competition.

That same transfer of welfare occurs in small countries, but the lesser efficiency of small-scale producers results in an overall welfare loss. In larger countries due to greater domestic competition, price increases after the import restrictions are likely less than the price increases in small countries. Thus, the impact of import restrictions on welfare in large countries is less clear. The loss to domestic consumers is likely smaller due to the lesser price increases. And the reduction in consumer welfare must be netted against the gains to the relatively more efficient large country producers.

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