Comment by naijaboiler
5 days ago
Every tax, and tariff a tax, is shared between producer and consumer depending on elasticity of demand for the goods
5 days ago
Every tax, and tariff a tax, is shared between producer and consumer depending on elasticity of demand for the goods
+1 I feel like this point really doesn't get mentioned enough if at all unless someone did some level of economics at high school/uni.
The tariffs are not paid for by the foreign producer and domestic consumer alone unless PED=0 or PES is extremely large.
Why is that the case? If an item (from every manufacturer) costs $5, and there's a new tax on it, making it cost $10, why would this be split between buyer and seller? The seller needs to make a certain margin on it, and it's not like the competition can sell any cheaper, or they already would have been.
If demand is elastic, then the seller has to lower prices (and their margin), otherwise people don’t buy their stuff (because they can do without). In this situation, the seller eats the tariffs, That’s the case for nice-to-have things like luxury goods and entertainment. If the seller cannot do that, e.g. because their margins become negative, they will just stop doing business (in the US or entirely).
The other end of the spectrum is stuff people cannot do without, in which case the seller has no incentive to lower their margins because their customers don’t have a choice. Then, tariffs are entirely paid by the buyer.
In reality, everything is in between and accurately estimating how much everyone will be paying is very difficult. What we can predict with certainty is that prices can only go up, and that some businesses will fold because they cannot absorb the loss.
Thanks for the explanation, that makes sense about the elastic demand.
The seller doesn't "need" to make any margin on it. Margins are set by the free market, and they are what they are, no more, no less.
Prices go down when demand goes down, right? Why's that, don't sellers need to make a certain margin?
A bunch of potential customers will buy at 5$ but not at 15$ so the seller will lose sales and hence money