When government policy makers, particularly in a developing country, impose a tariff on imports, they generally select an arbitrary tariff rate or a rate proposed by domestic interest groups such as producers. Such a tariff rate generally does not maximize welfare gain or minimize welfare loss, that is, it is not an optimal tariff. In this study we investigate whether India's ad valorem tariff of 50% on apple imports is optimal, and estimate the optimal tariff and welfare impacts. Our findings show that the Indian government policy is not only welfare reducing but is harmful if the excess supply is elastic. The findings underscore the importance of conducting economic studies and determining the optimal policy parameters as opposed to selecting them arbitrarily to meet the needs of a particular group.
- Optimal tariff