Metzler Paradox: When a Tariff Makes Imports Cheaper
In international trade theory, a tariff is generally expected to increase the domestic price of an imported good. However, the Metzler Paradox describes a surprising situation in which an import tariff may actually reduce the domestic relative price of imports. The paradox is associated with economist Lloyd A. Metzler and was discussed in his 1949 work on tariffs, terms of trade, and the distribution of national income. What Is a Tariff? A tariff is a tax imposed by a government on imported goods. Governments may use tariffs to: Protect domestic industries. Generate tax revenue. Reduce imports. Support domestic employment. Respond to unfair trade practices. Improve the country’s terms of trade. For a small country, a tariff normally increases the domestic price of imports by approximately the amount of the tariff because the country cannot influence the international price. Meaning of the Metzler Paradox The Metzler Paradox occurs when an import tariff imposed by a large countr...